Tesla Inc (NASDAQ:TSLA) surprised the Street with it Q4 2017 earnings release on Wednesday night, but analysts quickly drew investors back down to Earth. Tesla stock plunged during regular trading hours on Thursday after initially ticking higher in the minutes after the earnings release. The big story from the earnings release was Tesla’s free cash flow, but the reality might not be as good as was initially thought.
Multiple analysts remarked on Tesla’s free cash flow in their follow-up notes on the earnings release. Critics have consistently focused on cash burn as a critical area of concern, and then suddenly, this latest Tesla earnings release seemed to reveal a parting in the clouds.
Morgan Stanley analyst Adam Jonas estimates that Tesla’s free cash flow was about $500 million better than his estimate, adding that the company is entering this year with plenty of liquidity. He explained that capital expenditures were about $250 million lower than expected, while working capital was about $500 million better than expected. Meanwhile, customer deposits grew by almost $200 million.
Evercore ISI analyst George Galliers pointed out something about Tesla’s free cash flow that most analysts seemed to gloss over for the most part. He placed strong emphasis on the benefit from customer deposits. He also noted that Tesla Chief Financial Officer Deepak Ahuja said on the earnings call that this may not repeat. The automaker slashed its finished goods inventory for the Model S and Model X in Q4, which he said also will not repeat in the future. Thus, Galliers said investors should “question the quality and repeatability” of Tesla’s free cash flow development.
KeyBanc analyst Brad Erickson called attention to some peculiar management commentary. They said that they’re still targeting the same weekly milestones for production but added—basically—that they really have no idea whether the next milestone can be met as planned. We pointed out this commentary from the earnings release, but Erickson apparently picked up something else they said about the repeatedly-delayed cross-country autonomous road-trip, which he doesn’t feel made any sense.
“Management’s explanation for not meeting previously stated goals for autonomous vehicle demonstrations did not make sense to us,” he wrote. “We continue to believe that Model 3 backlog includes people who expect self-driving capability upon delivery, which is not likely to materialize.”
He feels that the “credibility” of Tesla’s management “took an incremental hit” based on what they didn’t say about Model 3 production. He noted that they wouldn’t provide the latest run rate on the car’s production.
Jonas expects the negative trading cycle around Tesla stock to receive a boost when Model 3 production finally does ramp. However, for now, he feels that Tesla stock is “fairly valued with high risk and potentially peaking expectations.” He maintained his Equal-weight rating and $379 price target on Tesla stock.
Erickson also maintained his Sector Weight rating and $345 price target on Tesla stock following the Q4 2017 earnings release. However, he seems more concerned than Jonas. He still believes the gross margin on the Model 3 is “significantly negative,” even though management continues to expect it to reach the mid-20% range by next year. He does expect Tesla stock to remain supported if demand for the mass-market EV continues based on “perceptions of its quality.” He noted that before the Q4 2017 earnings release, he picked up signs that the cars are arriving with slight blemishes that must be fixed before they can be delivered. Thus, if he sees “further consumer perception issues related to quality issues coming off the line,” then he expects trouble for the Model 3.
Tesla stock tumbled by more than 6% to as low as $321.60 in intraday trading on Thursday.