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Tesla (TSLA - Free Report) grew revenue and shrank losses in the first quarter of 2017, but while revenue of $2.70 billion outdid the Zacks Consensus by 5.3%, the quarterly loss of $1.24 was well short of the estimated 67 cents. What’s more, management wasn’t very open on the call, dodging important questions about the business and raising more questions than they answered. So naturally, shares took a nose dive, dropping over 7% in two days.
Question Of Inventory
CEO Elon Musk says customers are holding off on Model S purchases because they think its next iteration, the Model 3, is on the way. Since the 3 costs about half the S, this misconception seems improbable. At any rate, Musk is taking measures to wise up his customers, telling them how the 3 is a basic, entry-level model and won’t have many of the features the S has. The obvious though is that many people want to buy a cheaper model.
It’s completely believable what he said about downplaying the 3, because he doesn’t need the hype to result in an inventory pile-up going into a product launch. That said, the inventory turnover has been rising and rose again in the last quarter, so demand may not be dropping off.
Management explained the slight increase in new unit inventory: “The increase in inventory is about split in two. One is we increased Model X test drive vehicles by about a thousand over the past quarter. We had prioritized deliveries as we've ramped up Model X production, and prioritized getting cars to customers first, and to our stores second.
"Our stores have finally gotten their test drive fleets. And that's what you see in terms of half of the unit volume increase. The second half is in our service loaners. So as our installed fleet has gone up, we wanted to make sure that our owners were getting a service loaner, and so we will continually increase that, and you'll see that over time.”
Question of Customer Deposits
Tesla defines customer deposits as follows: Customer deposits primarily consist of cash payments from customers at the time they place an order for a vehicle and additional payments up to the point of delivery including the fair value of customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. Customer deposits are included in current liabilities until refunded or until they are applied to a customer’s purchase balance at time of delivery.
In the second quarter of 2016, customer deposits jumped 73.7% but since then there hasn’t really been anything to get excited about: +1.5% in the third quarter, -3.9% in the fourth quarter and then -7.1% in the first quarter of 2017.
By way of explanation, management said that the decline was related to greater efficiencies in Model X production and therefore deliveries getting up to speed. One would imagine that given all the hype around Model 3, customer deposits on the new car would be offsetting this effect. But that doesn’t seem to be happening yet.
Question of Margins
Management estimates that the Model 3 gross margin would be around 20% (that’s below the current level of around 24%, including other low-margin business). They expect the increased efficiencies of the Model S and X to take the gross margin on the older models to around 30% (timeline not clear), which may mean that overall gross margin ultimately won’t take too much of a hit.
They also say that the Model 3 production process is more efficient, which will help them increase output. Management expects to produce 5,000 cars a week this year and 10,000 a week some time next year. We can only hope that it happens soon because they have set a target of 500,000 units in 2018 (and that’s not a runrate). Importantly, since the 3 is a lower-margin lower-end car, the company needs to deliver a large number to execute per plan.
Another interesting point is the comment that the company will be increasing service loaners over time, which will be negative for margins.
Moreover, both R&D (up 1 percentage point in the last quarter) and SG&A (up 2 points in the last quarter) are growing rapidly as a percentage of sales, as the company braces itself to compete with more established automakers and readies itself for a new product launch.
Cash Flow
Currently the company is burning cash, although there was a nice decline in the last quarter. But expenses aren’t expected to come down now as it prepares for the Model 3 launch.
Debt Position Building Up
SolarCity brought a lot of leverage to the balance sheet and also increased interest payments. This is negative for cash flow and also means that there are constraints in raising funds for growth. Management hinted that there may be “funding rounds” or “dilution”, which makes sense since equity is a better option when the company is saddled with a considerable amount of debt.
U.S. Production
This may not be such a big issue right now because management apparently can’t make enough. But most of the established automakers have manufacturing relationships in China that will help them tap that market. China favors domestic manufacturing and is also one of the largest consumers of electric cars. Government policy could make it even more so. This is lost opportunity for Tesla.
Conclusion
All told, these are tough times for the new-age automaker that made quite a splash with its snazzy cars. Lot of plans seem to be in the offing, which could mean good growth in the future. But given the fact that the company will need to spend a lot more before it generates steady profit, its cash burn, considerable financial leverage and rich valuation, we think this is a highly risky bet. Tesla shares therefore carry a Zacks Rank #3 (Hold).
Other automakers like Ford (F - Free Report) and General Motors (GM - Free Report) , both ranked #3, also have problems of their own. But the space is still attractive with companies like Fiat Chrysler , Tata Motors and Volkswagen, all of which have a Zacks Rank #2 (Buy).
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>
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Tesla Models Are S3XY, Its Financials Not So Much
Tesla (TSLA - Free Report) grew revenue and shrank losses in the first quarter of 2017, but while revenue of $2.70 billion outdid the Zacks Consensus by 5.3%, the quarterly loss of $1.24 was well short of the estimated 67 cents. What’s more, management wasn’t very open on the call, dodging important questions about the business and raising more questions than they answered. So naturally, shares took a nose dive, dropping over 7% in two days.
Question Of Inventory
CEO Elon Musk says customers are holding off on Model S purchases because they think its next iteration, the Model 3, is on the way. Since the 3 costs about half the S, this misconception seems improbable. At any rate, Musk is taking measures to wise up his customers, telling them how the 3 is a basic, entry-level model and won’t have many of the features the S has. The obvious though is that many people want to buy a cheaper model.
It’s completely believable what he said about downplaying the 3, because he doesn’t need the hype to result in an inventory pile-up going into a product launch. That said, the inventory turnover has been rising and rose again in the last quarter, so demand may not be dropping off.
Management explained the slight increase in new unit inventory: “The increase in inventory is about split in two. One is we increased Model X test drive vehicles by about a thousand over the past quarter. We had prioritized deliveries as we've ramped up Model X production, and prioritized getting cars to customers first, and to our stores second.
"Our stores have finally gotten their test drive fleets. And that's what you see in terms of half of the unit volume increase. The second half is in our service loaners. So as our installed fleet has gone up, we wanted to make sure that our owners were getting a service loaner, and so we will continually increase that, and you'll see that over time.”
Question of Customer Deposits
Tesla defines customer deposits as follows: Customer deposits primarily consist of cash payments from customers at the time they place an order for a vehicle and additional payments up to the point of delivery including the fair value of customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. Customer deposits are included in current liabilities until refunded or until they are applied to a customer’s purchase balance at time of delivery.
In the second quarter of 2016, customer deposits jumped 73.7% but since then there hasn’t really been anything to get excited about: +1.5% in the third quarter, -3.9% in the fourth quarter and then -7.1% in the first quarter of 2017.
By way of explanation, management said that the decline was related to greater efficiencies in Model X production and therefore deliveries getting up to speed. One would imagine that given all the hype around Model 3, customer deposits on the new car would be offsetting this effect. But that doesn’t seem to be happening yet.
Question of Margins
Management estimates that the Model 3 gross margin would be around 20% (that’s below the current level of around 24%, including other low-margin business). They expect the increased efficiencies of the Model S and X to take the gross margin on the older models to around 30% (timeline not clear), which may mean that overall gross margin ultimately won’t take too much of a hit.
They also say that the Model 3 production process is more efficient, which will help them increase output. Management expects to produce 5,000 cars a week this year and 10,000 a week some time next year. We can only hope that it happens soon because they have set a target of 500,000 units in 2018 (and that’s not a runrate). Importantly, since the 3 is a lower-margin lower-end car, the company needs to deliver a large number to execute per plan.
Another interesting point is the comment that the company will be increasing service loaners over time, which will be negative for margins.
Moreover, both R&D (up 1 percentage point in the last quarter) and SG&A (up 2 points in the last quarter) are growing rapidly as a percentage of sales, as the company braces itself to compete with more established automakers and readies itself for a new product launch.
Cash Flow
Currently the company is burning cash, although there was a nice decline in the last quarter. But expenses aren’t expected to come down now as it prepares for the Model 3 launch.
Debt Position Building Up
SolarCity brought a lot of leverage to the balance sheet and also increased interest payments. This is negative for cash flow and also means that there are constraints in raising funds for growth. Management hinted that there may be “funding rounds” or “dilution”, which makes sense since equity is a better option when the company is saddled with a considerable amount of debt.
U.S. Production
This may not be such a big issue right now because management apparently can’t make enough. But most of the established automakers have manufacturing relationships in China that will help them tap that market. China favors domestic manufacturing and is also one of the largest consumers of electric cars. Government policy could make it even more so. This is lost opportunity for Tesla.
Conclusion
All told, these are tough times for the new-age automaker that made quite a splash with its snazzy cars. Lot of plans seem to be in the offing, which could mean good growth in the future. But given the fact that the company will need to spend a lot more before it generates steady profit, its cash burn, considerable financial leverage and rich valuation, we think this is a highly risky bet. Tesla shares therefore carry a Zacks Rank #3 (Hold).
Other automakers like Ford (F - Free Report) and General Motors (GM - Free Report) , both ranked #3, also have problems of their own. But the space is still attractive with companies like Fiat Chrysler , Tata Motors and Volkswagen, all of which have a Zacks Rank #2 (Buy).
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>