Tesla's Production, Free Cash Flow Impressive

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.

Also, they'll be moving the Model 3 deliveries into Europe and Asia in 2019. So there's a lot of positive things about Tesla right now. The $3 billion cash balance makes me pretty comfortable now, about their ability to pay off that convertible debt that comes due in March of $920 million.

Let's just keep in mind there's good momentum now, there remains to be seen how this will all carry into 2019 and a recession. Mitigating that somewhat is that the Model 3 deliveries will be moved and expanded into Europe and Asia. But at the same time if consumers really start to get truly panicked and scared their going to be very hesitant to buy what can be a $40,000, $50,000, $60,000 car.

Interesting longer term is just going to be the emergence of Tesla's autonomous business. They've got a new Harbor software update coming in, Version 9.0 really soon. And ultimately they want to compete with the likes of Uber and Lyft with autonomous ride-hailing. A subtle difference will be that if you own a Tesla personally you are going to be able to allow your vehicle to go into the Tesla fleet, while you're not using it and make some extra money. It remains to be seen how it's all going to shake out, how big it's going to be, and how many Tesla owners will really be willing to let someone else use their vehicle for many hours at a time while they don't need it.