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Tesla's Production, Free Cash Flow Impressive

We are increasing our fair value estimate and expect Model 3 momentum to continue into the fourth quarter.

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Dave Whiston: Tesla reported a really good quarter Wednesday night that's likely going to lead to about a 20% increase in my fair value estimate. I've been expecting some pretty good numbers on the back half of 2018 as Model 3 production and deliveries ramped up. But honestly the scale, in particular the free cash flow generation, was really impressive. They generated $881 million in free cash flow; that was about $1.6 billion improvement from second quarter. But also a $2.2 billion improvement from the burn they had in third quarter last year. 

Model 3 momentum is just really hot right now, and it's going to probably continue into the fourth quarter. It was really interesting to see Tesla disclose that over about over half of the vehicles that get traded in to buy a Model 3 were priced under $35,000 at the time of their purchase. Now obviously there's a time value of money component that Tesla's ignoring, but as Elon talked about in the second-quarter results, the top five trade-in vehicles are vehicles like the Prius, Honda Civic, Nissan Leaf, also the BMW 3 series. A lot of these vehicles are really more from what we call volume segments or mass market segments, rather than purely from a 3 Series Mercedes C-Class, Audi 384 customer. So there's a lot of mass market appeal for a premium vehicle that the Model 3 really is, it's not a cheap vehicle. I think the momentum there is going to continue for awhile. 

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

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