Tesla Inc. (TSLA.NASDAQ)
9 May 2018
“Boring Bonehead Questions are not Cool. Next”
Tesla’s shares have been volatile, with an annoyed Elon Musk who refused to answer analyst questions
during their 2018 first quarter earnings call causing Tesla’s share price to fall post the call. Soon after Elon
defended himself and vowed to ‘burn’ short sellers purchasing another $9.85m worth of Tesla shares, which saw the share price bounce back to recover losses made last week. Summarising the result, first quarter sales were $3.41 billion, up +26% year on year however increased Model 3 production meant Tesla delivered their largest quarterly loss of $710m. Tesla, who have yet to deliver a profit, believe once they can produce 5000 Model 3 per week they will be able to deliver a quarterly profit which is expected by the third quarter of this year.
2018 First Quarter Highlights:
• The company sold its 21,815 of its Model S and X and 8,182 Model 3 vehicles.
• Fourth quarter revenue of $3.41 billion beat market expectations and were up +26% year on year.
• Company remains a cash furnace with net losses during the quarter totalling $770 million.
Market Cap
• Model 3 production expected to ramp up to 5000 units per week by the end of Q2, and become profitable by Q3
“Boring Bonehead Questions are not Cool. Next!”
Tesla shares were initially up +2.2% after releasing their 2018 first quarter result. However, during the
conference call, after answering 10 or so analyst questions an annoyed Elon Musk refused to answer
questions regarding capital expenditure, saying “Boring Bonehead Questions are not cool. Next!”.
Musk then focused his attention to YouTube questions which were less focused on Tesla’s current
financial situation and cash burn and instead discussed their future product delivery which was
more interesting to Elon Musk.
Musk took time during the company’s first-quarter earnings call, to tell investors focused on “short-term
things” to avoid Tesla stock. “You should be focused on long-term things,” Musk said.
“We have no interest in satisfying the desires of day traders, like we couldn’t care less.
Please sell our stock and don’t buy it.”
Musk also noted that investors concerned about volatility “should definitely not” buy
Tesla stock. “I am not here to convince you to buy our stock. Do not buy it if volatility is
scary,” Musk added.
As a result, Tesla’s share priced soon dropped in afterhours trading and closed down –
5.54% by the end of the next trading day. As Musk may have to turn back to Wall Street
for future capital it will be interesting to see if Musk is forced to change his approach
in the future.
Soon afterwards Musk took to Twitter to defend himself and argued that the questions weren’t from investors but from “short sellers” and that the question was already answered in the headline of the first quarter newsletter. Later to summarise the result he said “Yeah, news is actually super good. Model S & X are producing major positive cash flow & Model 3 is about to do same.”
Soon after Elon then decided to “burn” all short sellers as he bought about $9.85m
worth of Tesla shares on Monday (8 May 2018) to bring his stake to now almost 20
percent. And as a result, Tesla shares have recovered after plunging due to the
comments made in the earnings call.
Revenue
Total first quarter revenue for Tesla came in at record $3.41 billion. This was up 26.3% year on year and beat market expectations by $110m.
Revenue by Segment
Tesla has three meaningful business segments. Automotive, energy generation/storage andservices/other.
Automotive revenue is the company’s largest sector and the company grew revenues
+19% year on year to $2.73 billion, and up +1% from the previous quarter (2017 fourth
quarter).
Revenue in energy generation and storage continue to grow from its relatively small base to $410 million, almost doubling (+92%) year on year, and up +38% from the previous quarter (2017 fourth quarter). Now that this is a meaningful part of the business, it will be interesting to see its growth and contribution in 2018.
Services and other revenue grew +37% year on year due to $263.4m due to higher used
car sales. However down -9% from the last quarter as used car sales were lower in 2018
first quarter due to lower inventory levels.
Earnings
In a theme that investors must be becoming accustomed to, first quarter net losses
widened for the company despite Model 3 production ramp up.
The company lost $710 million in the first quarter of 2018, this was the largest loss
reported at -$4.19 per share. The loss was driven by lower automotive gross profit
margin, which was 19.7%, which was down from 27.4% for the first quarter a year ago.
This was because Model 3’s gross margin remained negative during the quarter “due
to temporary underutilization of our manufacturing capacity.” In other words, Tesla
needs Model 3 production to increase significantly before per-unit costs come down
to reasonable levels.
Vehicle Production:
First quarter deliveries increased by +20% year on year totalling 29,997 vehicles, of
these deliveries 21,815 were for the Model S and X vehicles and 8,182 Model 3 vehicles.
Since Model 3 did not start production until the second half of 2017 the car accounted
for all of Tesla’s year on year growth.
Model 3 production hit 2,270 per week in April and notched the 3rd straight week over
2,000. This indicates that the company is starting to get it right in terms of ramping up
production.
Tesla talk about “the machine that builds the machine” and why it is so important to Tesla’s long-term
success. They believe that thinking about the factory in the same way they think about product itself
creates the potential for a step change in manufacturing that will create enormous benefits for
quality, cost, efficiency and employee safety. They aim to create
factories that are producing the
world’s highest quality cares as quickly and as cost effectively as possible and their
automation strategy is their key to achieving it.
Model 3
For those that do not know or are new to analysing Tesla. The Model 3 is a mid-size
electric four door sedan. The car was announced by CEO Elon Musk in March 2016 and
with a starting price of US$35,000 is the company’s first foray into mainstream as opposed to luxury vehicles. The performance of the Tesla stock price is most influenced by the success or failure of Model 3 production due to its demand and market potential.
At this stage it appears Model 3 is already on the cusp of becoming the bestselling mid-
sized premium dean in the US. With consumers have clearly shown that electric
vehicles are more desirable when priced on par with internal combustion engine
competitors.
Tesla are targeting Model 3 production volume of 5,000 units per week, they expect to
hit this milestone in about two months, while operating a semi-automatic production
line. The significance to this number is at that volume, they expect to operate at a
breakeven gross margin for the second quarter, while expecting positive margin
contribution in the third and fourth quarter.
The team in Germany is working on installing the new automated line, which would
significantly reduce manufacturing costs and improve margins and further increase
capacity.
Once they hit 5,000 units per week, they intend to incorporate learnings to increase
output of their existing manufacturing lines in a capital efficient manner before further
increasing capacity to 10,000 units per week in the most capital and margin efficient
manner.
Model 3 Demand
Despite the production problems there is clearly demand for the Model 3. You are
able to reserve a Model 3 for a refundable deposit of $1000. On the morning of
March 31, 2016, tens of thousands of people wait in lines to place the deposit,
even though they had not yet seen the car. Two days after announcing the car
the company had 232,000 reservations
Figure 1 Model 3
that represent potential sales of US$11.5
billion. Upon its release in July 2017 there had been over 500,000 reservations for the
Model 3. As a bit of anecdotal evidence of demand, when you call the Tesla number
here in Auckland, the first thing you hear is a tired voice recording saying that if you
have any enquiries surrounding the Model 3 then you should enquire online. In our
view demand clearly exists for the product.
Anecdotal Evidence:
The information that follows is completely anecdotal and is certainly not scientific and
is just based off our experience. About 18 months ago, we did not see any Tesla
vehicles driving around Auckland. Then we would occasionally see one or two, it would
be exciting, and we would point it out. A few months later we started seeing a Tesla
on average, once per week. Now in certain parts of Auckland we are starting to see
few of them almost every day. We expect this trend to accelerate.
Guidance:
This is a crucial year for Tesla. As the company battles against “bottlenecks” on the
Model 3 they expect demand to continue to outpace production.
Tesla expect to shut down production for about 10 days to address these bottlenecks
across the lines and increase production to new levels.
Their goal is to produce approximately 5,000 Model 3 vehicles per week in two months
(end of the second quarter). Model S and X deliveries in the second quarter are likely
to be similar to the first quarter and then ramp up in the third to achieve 100,000
deliveries for the full year, which isn’t much of push from 22,000 in the first quarter.
The long term gross margin target of 25% for Model 3 has not changed. However, over
the medium term they expected weaker than expected (an improvement from the
current negative) margins due to higher labour costs and slightly less automation than
expected as well as higher material costs from newly appointed tariffs, commodity
price increases and a weaker US dollar. On the other hand some of these may be passed
onto the consumer with higher than expected average selling price than previously
expected.
Tesla expect to hit full GAAP profitability in the third and fourth quarter and total 2018
capex to be slightly below $3 billion.
Summary:
With missed production targets and the likelihood of further “bottlenecks” ahead as
well as high levels of debt and shareholder dilution (that we have not even discussed)
we ought to be sell rated on Tesla. What is stopping us the fact that the company has
what we consider a fantastic product. Demand for Tesla considerably outstrips the
company’s current ability to supply (if Tesla could deliver 1 million vehicles, they would
probably sell them). We believe that it is probable that the company will eventually
meet the demand with supply. Until then we believe that the company will continue
to be plagued by bottlenecks that will make the stock price volatile for holders. For
this reason, it is difficult to see upside in the stock without increased Model 3
production. We will be watching closely for when there are developments in
productivity and will reconsider our recommendation at this point.