We Expect Improvement From Tesla
We are giving Tesla the benefit of the doubt and maintaining our fair value estimate.
We expect Tesla's (TSLA) first-quarter loss to be the low point for 2019, and we see no reason to change our fair value estimate. Adjusted diluted EPS of negative $2.90 badly missed consensus of negative $0.69. Revenue grew 33% year over year but fell 37% from the fourth quarter, missing consensus, due to Tesla's previously disclosed sequential delivery decline of 31%. We reiterate our April 4 note comments: For now we are giving Tesla the benefit of the doubt that the first-quarter deliveries were a function of problems introducing the Model 3 to Europe and China rather than a demand shortfall. We also said Tesla needs to adjust operations so it can produce to meet demand in all geographic markets at the same time; otherwise it will never scale, in our view. In the first quarter, Tesla produced in batches for geographic locales--what it calls the "wave" approach--so the U.S. got starved for Model 3s in the first half of the quarter so Europe and China could be supplied. With all product coming from California, the long shipping times caused half of first-quarter deliveries to occur in the last 10 days of March. The company is starting to unwind the wave now, but we think realistically it just needs more capacity, which is why having the Shanghai Gigafactory plant on line late this year is important.
GAAP free cash flow burn of $919.5 million was slightly better than $1.05 billion in the prior-year quarter but far from the roughly $900 million positive free cash flow in each of the third and fourth quarters of 2018. The cash balance fell by $1.5 billion from Dec. 31 to $2.2 billion. We suspect the market was expecting something worse for cash on hand, and if management can deliver on curbing the negative working capital impact of the wave, we are not worried about cash for 2019. Management expects positive free cash flow for each of the remaining 2019 quarters, a significantly reduced second-quarter loss versus the first quarter, and third-quarter profitability.
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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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