Tesla Inc (TSLA) stock ticked higher immediately after the company’s earnings report but has since reversed course. Analysts are calling the company’s fourth quarter performance mixed at best and are calling out management’s claim that they won’t need a capital raise to support the Model 3. More than one says this morning that they believe another raise will be needed, and even the most bullish analysts aren’t expecting Tesla Inc (TSLA) to meet the ambitious timeline it set for the Model 3 launch.
Will the Model 3 really multiple Tesla’s (TSLA) sales by five?
Morgan Stanley analyst Adam Jonas, who is one of the few analysts with an Overweight rating on Tesla Inc (TSLA) stock (and a sizable $305 price target to go with it), played up the drama surrounding the Model 3. Investors were initially impressed that the company said production is on track to begin later this year, but many analysts are once again calling it into question. Jonas, however, called out the reiterated outlook for the Model 3 timeline as “the most important factor from the release.”
The company said it still expects to produce 5,000 Model 3 units per week in the fourth quarter, although Jonas isn’t expecting this before 2020. It claims it is on track to produce 10,000 units a week by 2018, although even the bullish Jonas doesn’t expect this until 2025. He’s actually predicting a “soft launch” of the mass-market car next year with “no more than a small/modest amount of customer deliveries.” He’s only looking for 2,000 Model 3 deliveries this year.
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Tesla’s (TSLA) cash burn worsens
While Jonas prefers to focus on the Model 3, most bears are turning their attention to the company’s cash burn. UBS analyst Colin Langan has a Sell rating and $160 price target on Tesla Inc (TSLA) stock, and he noted that the cash burn was “bad and is getting worse.” The company’s free cash flow in the fourth quarter was -$970 million or -$758 million with collateralized lease borrowing.
While that was better than the -$1.1 billion Langan was expecting, the free cash flow includes a $77 million gain from solar, and the capital expenditures amounted to $522 million, which was far below management’s outlook of $1.05 billion. The UBS analyst notes that this implies that the core operating performance was worse than he had expected.
Further, the cash burn is just going to get worse in the first half of this year, and CEO Elon Musk said this will take the company “close to the edge.” He added that he’s keeping his options open and may consider a capital raise. It certainly sounds like one is practically guaranteed. Langan said with a minimum $1 billion needed, implied cash burn reaches $2.4 billion.
He’s even bearish on whether the Model 3 will be profitable, at least at first. He expects the margin to fall throughout the production ramp, and management confirmed this on the earnings call, with Musk describing the car’s margin as “horribly negative” at the beginning but with exponential improvement as production ramps.
Tesla (TSLA) may be on track after all
Deutsche Bank analyst Rod Lache, who has a Hold rating on Tesla Inc (TSLA) stock due to valuation, pulled several data points that suggest Tesla is actually on track for its targets. For example, he found the sales trajectory for the Model S and X to be positive with a 49% year over year increase. He also pointed to the Model 3 timeline and the vehicle gross margin trajectory. Further, he noted that Tesla Inc (TSLA) has finally managed to stem SolarCity’s cash burn and seems to have made “good progress” in the shift to cash sales, which consisted of 28% rather than 4% in the year-ago quarter.
The Deutsche Bank analyst was “encouraged” by the company’s progress and still sees it as “in an advantaged position to several of the most important Auto Industry trends.” His cautiousness on Tesla Inc (TSLA) stock is due to valuation because of the major risks and uncertainties, especially regarding the capital and cost plans.
Shares of Tesla Inc (TSLA) stock tumbled by as much as 4.82% to $260.32 in early trading on Thursday morning.