Read part 1 here
Because of its unique position as a relatively new player in a massive and well-established industry, conventional financial analysis of Tesla (TSLA - Free Report) often yields more questions than answers. To make some sense of the numbers it can be easier to use an analogy about a simpler situation, so let’s start with an (admittedly oversimplified) anecdote:
Imagine that a very bright and hard-working relative of yours came to you with an investment idea - say, a hot-dog stand - and asked you for cash to fund the startup in exchange for equity in the new venture. You like the idea and decide to make the investment. Your hope is that the business will be profitable and that through some combination of receiving dividends and selling your shares you will experience a return of your original investment and a healthy return for the risk you assumed.
After the first day you call your nephew to ask how things are going and he reports that he spent the entire day buying equipment and supplies, obtaining permits, procuring products to sell and hiring the first employee. At this discreet point in time, the “earnings” of the business would be negative as it had spent money and had yet to see the first dollar in revenue, but you could hardly be disappointed because progress had been made toward becoming a going concern.
After the second day, your nephew reports that after opening for business, there was a line around the block all day and that they had sold out of all the inventory and had to scramble to buy more in order to satisfy demand. He is planning to significantly increase his orders of raw materials and hire a second employee. It’s another “losing” day on the income statement, but also clearly progress toward the ultimate goal of profitability.
After the third day (and once again selling out all the available product), your nephew tells you he’s put down a deposit on four more carts, hired 9 more employees including a manager, bought some advertising and secured contracts for the timely delivery of everything they need to run the business.
But it’s a third losing day!
Oh, and your nephew mentions he might need some more cash in the form of a loan to secure some of these new obligations.
By now you see where this is going...
This is still a healthy business, but a day is not the right amount of time to judge its performance, at least if you’re using earnings as the barometer.
For a new business that is growing into a large market, earnings in the current period is not necessarily a good measure of the strength of the business or the prospects for future success. Investing in the future is more important than showing an immediate profit. The periods typically used for measuring the performance of more mature companies – Quarters and Years – aren’t necessarily the right time frame for assessing the trajectory of a high-growth business. But surely there must be something better to use…
Tesla by the Numbers
Tesla has no net earnings and has actually been reporting growing quarterly losses, from -$1.33/share in Q1 2017 to -$3.04 in Q4 with a total loss in 2017 of -$8.62/share. So not only are they losing money, but they’ve been losing an increasing amount of money lately as they attempt to ramp up production of the Model 3.
What if we look at the expected trajectory of earnings out into the future using the Zacks Consensus Estimate? Analysts expect a 2018 Q1 loss of -$3.15/share, but an improvement to -$2.02 in Q2, a total loss on the year of $7.05/share and a profit of $1.63/share in 2019.
The current period could be considered an inflection point for the stock. If they are able to produce and sell the Model 3 at 5000 cars per week by the end of June, it’s entirely possibility to see meaningful profits within a year. If not, things could stay ugly.
A quick note on the Consensus Estimate. The estimate is the numerical average of all the analysts surveyed. It’s distilled to a single number for comparison purposes, but another part of the data is also important – the range of all the estimates, which is a measure of how much the analysts agree.
So here are some comparisons to put the TSLA estimates in context: Let’s compare it to three other automakers with similar market capitalization. The Zacks Consensus estimate for Ford Motor Company (F - Free Report) is $1.55/share, and the range from the low estimate to the highest is $1.44/share to $1.66 – a fairly tight spread suggesting strong agreement among those surveyed. The estimate for General Motors (GM - Free Report) is $6.29/share with a range of $5.86 to $6.24. Honda Motor Corp. (HMC - Free Report) has a consensus estimate of $5.36/share and a range of $5.25 to $5.47. Clearly the analysts seem to have a pretty good idea about what these companies are likely to earn, with none expecting much of a surprise in either direction.
TSLA on the other hand, has an extremely wide range of estimates. Expected to post a 2018 loss of -$7.05/ share, the range of estimates varies from a loss of -$3.33 to a loss of a whopping -$12.58. The 2019 estimates are nearly as varied with the Consensus Estimate of a $1.63 /share in profits consisting of a range of estimates between a loss of -$0.90 and a profit of $6.00.
This means that even among financial experts, the earnings picture for Tesla is hugely uncertain.
Sales, Cash & Production
If Tesla’s net earnings are difficult to get a handle on, its revenues certainly are not. They have steadily and dramatically increased sales over the past 6 years. In fact, they have posted an increase in TTM revenue (trailing twelve months) in each and every quarter all the way back to September of 2012. Over that period, revenues have grown from just $146M to $11.76 Billion.
Read more about Tesla's revenue history here
Perhaps not surprisingly, analyst expectations for sales growth vary almost as widely as for net earnings. The Zacks Consensus for sales in 2018 is $18.8B. The range of estimates is $14B to $23B. If Tesla is able to realize its stated production goal of 5000 Model 3’s per week and sells them at an average price of something like $45,000 each, it would suggest an increase in sales of nearly $12B over 2017 when they sold basically no Model 3’s at all. (This assumes sales of the Model S and model X remain fairly constant.) A quick look at the range of revenue estimates suggest that those analysts on the high end expect Tesla to get to producing 5000/week fairly quickly, while those at the low end must believe they will barely even continue producing the current 2000/week.
A quick note on price/sales valuation. While Earnings per Share valuation is largely meaningless in a stock with no net profits, Price to Sales allows more of an “apples to apples” comparison of the stock price relative to its peers. By this measure, Tesla’s P/S ratio of 4.1 is extremely high compared to GM (0.4), Ford (0.3) and Honda (0.5). Though it has been declining steadily (see below), even if we experience the rosiest of scenarios with regard to sales, Tesla stock will remain richly valued compared to the competition based on sales.
A widely reported and eye-popping figure is that Tesla is currently burning $6500 a minute – or almost $900M/quarter in more common terms. While technically true, the euphemism can be a little misleading. “Burning” would suggest that the money currently being spent has been completely wasted, but that’s not necessarily the case. Tesla is investing in tangible capital equipment which ends up on the balance sheet, and intangible items like employee training which don’t, but which certainly add to the value of the company into the future.
The big question with regard to Tesla’s use of cash is how long it can continue. At the end of 2017, Tesla has just over $3.5B of cash on its balance sheet. With the burn of $900M a quarter, it’s pretty simple math to see that at the current rate, they will need to raise cash in 2018 in order to continue operations.
Unless they don’t.
The company announced earlier this month that they would not be tapping the capital markets in 2018 (outside current lines of credit), much to the relief of investors. Though they didn’t offer any more detail, it’s easy to assume that they mostly expect to raise cash the old-fashioned way, buy selling product. Here again, the company’s fortunes hinge on their ability to produce Model 3s. With 400,000 people on the waiting list for one, and 2000 rolling out per week, there’s a nearly 4-year backlog of (mostly patient) paying customers waiting. If they can ramp it up to 5000/week, that’s almost a year and a half of cash rolling in fast– more than enough to fund current operations and future R&D.
As you can tell by now, the wide range of expectations for Tesla’s stock price is not unjustified by the available data. Depending on one’s expectation for production, the numbers at both the low and high ends of the range are perfectly justifiable.
That’s why this is the inflection point – with information about bottlenecks and production delays being rumored, but with no hard evidence - investors really have to make a guess about whether Tesla can get Model 3’s on the road in significant numbers. Everything hinges on that for the moment.
read part 3 here