Investors Shrug Off Tesla Loss, Still Believe In Future.
“Tesla (will be) the lowest-cost manufacturer with the most competitive mass-market product for at least four to five years”
Tesla Inc lost a record $671 million in the 3rd quarter, but most investors preferred to avert their gaze from mundane short term problems and clung to their big vision of the future.
The record quarterly loss compared with a small profit in the same period last year of $22 million, but investors were more concerned about the production prospects for the Model 3, the so-called mass market electric car. The target of making 5,000 Model 3s a week was pushed back to the first quarter of 2018 because of various production problems, mainly battery assembly at the Nevada Gigafactory.
Cash burn hit $1.4 billion in the quarter compared with $1.16 billion the previous quarter.
Long-time Tesla cheer-leader Adam Jonas of investment bank Morgan Stanley was cautiously optimistic.
“When assessing the stock price reaction following a Tesla earnings event we ask ourselves 3 simple questions –
What is happening to demand for the product?
What is the pace of cash consumption?
How open are capital markets to funding Tesla’s very ambitious growth plan?
For Q317, we feel decent about the first question, somewhat concerned about the second question and are confident in the 3rd question… for now,” Jonas said.
Investment researcher Evercore ISI liked Tesla’s openness about the problems, but cut its own prediction for Model 3 output. It didn’t agree with Tesla’s predictions, but wasn’t overly concerned about the probable outcome.
“What are the implications for 2018 and 2019? While behind, if Tesla does hit its target of 5,000 units a week by the end of Q1 then we see Model 3 production of about 293,000 as feasible. In our own model, we now assume that 5,000 is not reached until the middle of Q2, resulting in production of 268,000 units. As a result we cut our 2018 Model 3 delivery forecast by 14,000 to 258,000,” Evercore ISI analyst Arndt Ellinghorst said.
“However for 2019, our Model 3 forecast is largely unchanged given we are only forecasting deliveries of 326,000 which should easily be met even if the ramp to 10,000 units a week takes substantially longer than presently expected,” Ellinghorst said.
Berenberg Bank of Hamburg, Germany said the Model 3 delay was disappointing and damaged Tesla’s credibility but long-term prospects won’t be harmed if the new target is met. The price for the delay is $1 billion of additional cash burn, although the 5,000 per week Model 3 run-rate would generate enough free cash flow to avoid more borrowing.
Tesla’s ambitious levels of automation will eventually pay off. Production of 5,000 Model 3s a week in the second quarter will generate cash profits of $690 million, net of customer deposits of $60 million, based on a $50,000 selling price, the bank said.
“Tesla’s commitment towards a manufacturing process that is orders of magnitude more automated and efficient than conventional lines has always carried higher risk of ramp-up bottlenecks. In this and the next quarter, Tesla will pay the price for this. However, despite this setback the pursuit of such a degree of automation is not compromised, only delayed, and will position Tesla as the lowest-cost manufacturer with the most competitive mass-market product for at least four to five years,” Berenberg Bank analyst Alexander Haissl said.
But Charley Grant, Wall Street Journal’s Heard on the Street columnist and Tesla doubter, said the cash burn was troubling and the vision in doubt.
“Tesla burned through a record amount of cash during the period – some $1.4 billion. That is disconcerting, but investors’ emphasis has been on the future with this company. Developments during the quarter make CEO Elon Musk’s vision look more and more like a pipe dream,” Grant said.
Morgan Stanley’s Jonas said when Tesla’s share price falls, that represents a buying opportunity because he expects the Model 3 to be a success over the next couple of years, with the biggest problem being meeting demand.
But he had fears for the longer term as the competition cranks up their rival machines.
“Longer term, we continue to harbour serious concerns about the sustainability of Tesla’s competitive moat vs what we see as the inevitable encroachment from tech firms both in the U.S. and internationally that have superior access to capital and human talent and business models that can withstand substantial operating losses in the business of share/automated/electric transport to monetize consumer time……” Jonas said.