Tesla stock is back on the rise again today after hitting the skids earlier this month not long before and after the automaker’s disappointing earnings report. Of course part of the issue has been the loss of the momentum that carried the stock and other investor favorites along for much of last year, but there’s no denying the risk that goes along with owning Tesla Motors Inc (NASDAQ:TSLA) shares.
Shares are trading at $187.95 as of this writing. It appears Tesla stock is testing the $190 level as it starts to pull back right after briefly topping $190 per share.
Goldman remains Neutral on Tesla stock but praises operations
Goldman Sacha analyst Patrick Archambault and team issued a report today covering their recent trip to Silicon Valley in which they visited Tesla and other automotive-related companies, including suppliers. One of their stops was at Tesla’s factory in Fremont, Calif. where they met with CEO Elon Musk, Autopilot Director Sterling Anderson and CFO Jason Wheeler.
They report that the factory has changed a lot since they visited the last time over a year ago. For example, they said the automaker has grown into the space it has and now is more fully utilizing it. In fact, they expect future expansions will result in non-assembly functions being moved to satellite facilities.
Currently Tesla has five facilities, including the main factory in Fremont, the gigafactory, facilities for metal casting and assembling seats, and another light manufacturing facility in the Netherlands. The automaker is running about an 80% vertically integrated operation.
Update on Model X production
Analysts from multiple firms have made it clear that Tesla stock depends heavily on what happens with the Model X. We’ve known for quite some time that the automaker has been having trouble producing the crossover vehicle, and this has impacted its ability to meet its delivery targets.
The Goldman team found on their visit to the Fremont factory that there are Model Xs coming down the assembly line “interspersed with Model S vehicles.” They added that the body shop that’s working on the SUV still isn’t running at full capacity as Tesla management said they’re doing what they call burst builds,” which involves assembling a group of the SUVs and then inspect them fully at various stages throughout assembly.
Also on their manufacturing tour, Archambault and team found that Tesla continues to improve its battery cells in density, safety and duration, with some tests checking for more than 1,000 cycles to improve duration. They noted that although the automaker doesn’t specifically outline exact costs, representatives said $200 per kilowatt-hour is about where they are right now, and they’re targeting less than $100 per kilowatt-hour per pack.
Questions about cash flow
The analysts also had questions for Wheeler about cash flow definitions, a topic which investors would do well to pay attention to as it concerns some bears quite a lot. Recently the automaker revealed what it calls “core operational cash flow,” a new idea that involves another new term called “asset backed lending.” Management sees this new cash flow reporting method as being fair because firm customer orders back all of their “finished goods inventory” (FGI).
The Goldman team explained that “the ABL becomes more about managing the cash cycle as they grow the business than just adding leverage,” adding, “The facility will be leveraged quite a bit in the second quarter when the company builds out FGI to support international expansion of the Model X, particularly as FGI inventories were significantly drawn down in 4Q15.”
They don’t seem too worried about the ABL, which Tesla management assured them will enable the ramps of the Model X and S to self-fund. However, they’re still looking into how much cash the Model 3 mass market car will require as it will require a lot more investment because they intend it to be a high volume car.
The problem of autonomous driving
In their meeting with Musk and Anderson, they discussed technological developments, and one of the big topics lately has been autonomous driving. Tesla, Google and others are in a race to be the first to roll out fully autonomous vehicles, and Musk told the Goldman analysts that he has become skeptical that machine learning and Deep Neural Networks will be able to handle some of the harder problems with artificial intelligence.
Autonomous vehicles will have to solve problems with 99.999% accuracy to be viable in the mass market, and he said that machine learning can reach 80% or 90% accuracy but comes up short of where it needs to be. Further, he said no one will be surprised by the emergence of autonomous vehicles as regulators will need vast amounts of data to prove that they are a lot safer than cars driven by humans. He noted that in some international regions like Hong Kong, regulators pushed back against their attempt to implement the semi-autonomous Autopilot feature.
Tesla stock climbed by more than 1% before beginning to pull back as the regular trading day wore on.