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Stock Analyst Update

Can Tesla Start Turning a Profit?

Tesla reported another loss in the second quarter, but CEO Elon Musk is upbeat that the firm will be profitable going forward.

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 Tesla (TSLA) reported another loss for its second quarter (adjusted EPS of negative $3.06 missed consensus of a loss of $2.92) but CEO Elon Musk sounded very upbeat about the rest of the year as Model 3 production has stayed at 5,000 units a week into July and he targets 6,000 by late August and 10,000 some time in 2019. Musk now expects Tesla to be profitable and free cash flow positive on a GAAP basis going forward each quarter barring a recession or other major negative macroeconomic event. Also interesting is that Musk expects to retire, not refinance, debt via internal cash generation as soon as this year when large convertible bonds come due. He also still does not expect to issue equity this year, so we are now giving him the benefit of the doubt and no longer model a 2018 secondary offering but do model one in 2019. We are not changing our fair value estimate. We think the long-term story on what Tesla can achieve in electric cars, trucks, mobility, and energy generation and storage will ultimately determine the value of the company. We believe the stock trades on option value that, if realized, is still many years away, and therefore we do not think any single quarter's results are critical to the investment thesis.

We calculate adjusted free cash flow of negative $706.5 million compared with negative $942 million in the first quarter and negative $1 billion in the second quarter of 2017. This burn could have been worse because Tesla likely incurred large production costs at the end of the quarter to meet the Model 3 production target of 5,000/week yet most of these vehicles were likely not booked in revenue until the third quarter after delivery to the customer. The company finished the quarter with $2.2 billion of cash and management lowered its 2018 capital expenditure projection to slightly below $2.5 billion from slightly below $3 billion. Total vehicle deliveries in the second quarter rose 85% year over year and by 36% sequentially to 40,768.

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David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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