Tesla Finances Reassure Investors, Leave Commentators Cold.
“We remain extremely concerned about competitive pressure in EVs and AVs from the world’s largest tech firms”
Initial reaction to Tesla Inc’s latest financial report was mixed, with investment bankers willing to give the electric car maker the benefit of the doubt, while media commentators were more scathing.
Investors were cheered by CEO Elon Musk sticking to revised production targets for its Model 3 sedan after two delays, but plans to raise spending this year pointed to Tesla’s possible growing need for cash.
Barriers to the Model 3 production target of 5,000 vehicles a week by the end of the second quarter were being overcome, Musk told analysts on a conference call. Once at that production rate, Tesla could begin to generate sustained positive operating income in 2018, Musk said.
Tesla lost nearly $2 billion last year, and notched up its biggest-ever quarterly loss in the final three months. But the loss was not as big as analysts were expecting.
Investment researcher Evercore ISI wasn’t reassured by Musk’s assurances on Model 3 production, but said better than expected free cash burn gave Tesla breathing space.
“We believe yesterday’s results give equally to both the bulls and the bears. Bulls will be comforted by the better than expected balance sheet which gives Tesla more time to resolve the Model 3. Many bulls believe that the primary risk to Tesla’s longer-term equity story is liquidity during the Model 3 ramp. At the margin, this risk has arguably diminished,” Evercore ISI analyst George Galliers said.
“Bears will point to the fact that Model 3 problems persist and that the end is still some way off. At the same time, gross margins on S (sedan) and X (SUV) are declining and many of the factors driving the free cash flow performance in Q4 are not necessarily repeatable,” Galliers said.
Morgan Stanley was in positive mode, pointing to the better than expected free cash flow – half a billion above its estimates.
“The company enters 2018 with ample liquidity and is negative trade cycle should see a boost when Model 3 ramps. We think Tesla is fairly valued with high risk and potentially peaking expectations,” Morgan Stanley analyst Adam Jonas said.
Jonas was worried though about long-term threats to Tesla from non traditional competitors.
“We remain extremely concerned about competitive pressure in EVs (electric vehicles) and AVs (autonomous vehicles) from the world’s largest tech firms and an inability to access foreign markets such as China in a sustainable way. On our math, Tesla shares offer only modest 10%-type upside to fair value,” Jonas said.
Long-term Tesla critic, Wall Street Journal Heard on the Street columnist Charley Grant, was being consistent, with an article headed “Tesla Can’t Defy Gravity forever”.
Grant pointed out that the loss per share in the 4th quarter was much worse than expected a year ago, and couldn‘t resist the temptation to remind readers about Musk’s high profile rocket launch involving the Tesla roadster earlier this week, and the need for him to address challenges back here on earth.
“Granted, investor faith in Mr Musk is as strong as ever, and Tesla still enjoys open access to capital markets. Fears of a crash in the stock price aren’t likely to materialize anytime soon. However Tesla’s chances of becoming a sustainable business that doesn’t need constant capital markets access to survive seems less likely than a sports car in orbit,” Grant said.
Reuters Breaking Views columnist Antony Currie said Tesla looks set to “incinerate truckloads of greenbacks this year”, while he expects more capital market needs in 2018.
“Keeping the carmaker’s focus solidly on the road ahead requires more than just tinkering. Another multibillion-stock sale is fast approaching,” Currie said.
German investment bank Berenberg had no such qualms and said Tesla’s latest report meant its worries about the company were fading, and pointed to a capital increase being increasingly unlikely.
“Model 3 production targets have been confirmed and the company targets to generate operating profit on a sustained basis at some point in 2018, once it is operating with a Model 3 production rate of 5,000 units per week. We maintain our Buy rating and increase our price target to $470 from $455,” said Berenberg analyst Alexander Haissl.
Tesla stock closed Wednesday at $345.00.