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Tesla Q1 2018 Quarterly Earnings Breakdown – Tesla Beats Estimates

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Tesla (NASDAQ:TSLA) released its first quarter 2018 results today and it posted a solid beat on both revenue and earnings (losses) per share. Shares were down over 5% in after-hours trading as of this writing.

Key Facts

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  • Q12018 (Automotive) revenue of $2.7 billion up from $2.3 billion a year ago, a 19% increase
  • Q12018 (Automotive) loss of $709 million for the quarter
  • Cash balance of $2.7 billion at the end of Q1
  • Model 3 production reached 2,270/week in April
  • Expecting positive GAAP net income and positive cash flow in Q3 and Q4 2018

The overall story for Tesla today is that they are still losing money, while revenue is trending up. The first quarter of the year saw the Palo Alto-based automaker burn through $1.05 billion in cash, leaving them with $2.67 billion in cash on hand.

Revenue for automotive sales reached $3.41 billion, a healthy increase from the $2.68 billion in sales Tesla did in Q1 2017. Margins did drop from 27.4% to 19.7% which should be expected as the lower cost, and lower margin Model 3 starts to weigh in on the product mix.

Somewhat unexpected, revenues from the company's "Energy Generation and Storage" more than doubled Y-o-Y to $375 million, up from $151 million in Q1 2017.

Operating losses reached $709 million this quarter, up 115% Y-o-Y from the $330 million the company lost in Q1 2017. The increase in losses is primarily due to major capital and operating expenses incurred as a result of the Model 3 ramp.

This is basically all par for the course at Tesla. The real takeaway here is that Elon Musk is promising true GAAP positive cash flow and profitability this year. It all comes down to one thing - the Tesla Model 3..

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Tesla Model 3 Production Update and Why It's So Important

Tesla Model 3

Tesla did not disclose Model 3 preorder numbers but we know its huge - they report over $900 million cash from deposits remaining. If you consider deposits are a flat $1,000 then it's fairly easy to surmise that they have over 900,000 preorders. The automaker did formally announce it had reached over 500,000 pre-orders back in the summer of 2017.

At an estimated $45,000 ASP (average selling price), this is a potential $40.5 billion in revenue! Tesla disclosed this year they are averaging an additional  1,800 pre-orders a day, and it's important to remember this basically guarantees revenue from Model 3 sales. As soon as one is built there is a waiting customer.

The demand is simply unprecedented for "premium" mid-size sedans. The Model 3 is priced against well-known competitors such as the BMW 3 Series, Mercedes C-Class, Lexus IS, and Audi A4. Tesla released the following chart along with a letter to shareholders in today's earnings statement.


Model 3 market share

Tesla did publish exact Model 3 production numbers. The auto manufacturer reached 2,270/week  Model 3's in April, which marked 3 consecutive weeks of over 2,000 units produced per week.

This allowed Tesla to sell over 12,000 vehicles in the first quarter, the mix was comprised of 12,000 Model S and X's, and about 8,000 Model 3's.

However, as seen by the quarter's cash bleed this is simply not enough. In the letter to its shareholders, Tesla cited a benchmark number of 5,000 Model 3's shipped per week as its goal. This number is specifically called out numerous times and Tesla is very confident now it can reach that number by the end of July.

Tesla gives very concise and bold guidance when it highlights just how important the Model 3 is in its letter:

If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock based compensation in Q3 and Q4 and we expect to also achieve full GAAP profitability in each of these quarters. This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4. Ultimately, the growth of Model 3 and the profit associated with it will help us
accelerate the transition to sustainable energy even faster.

5,000 Model 3's per week, at an ASP of $45,000, would return roughly $900M in revenue per month for the company. At this production level, the Model 3 would be guaranteed to be the highest ever selling premium mid-size sedan and would even start to rival mainstream favorites like the Honda Accord, which sells 20,000 to 30,000 a month in the US.

Even at these rates, it would take over three years to fulfill existing pre-orders. Tesla is fully aware of this and plans to celebrate 10,000 Model 3 vehicles manufactured per week by the end of 2019.

Tesla Outlook for the Remainder of 2018

The increased cash burn observed this quarter could be viewed as alarming, but the automaker has a very good explanation. It's natural to expect any manufacturer to outlay serious cash as it modifies and enlarges any production line and that is exactly what we are seeing with Tesla right now.

Model 3 reservations are very strong and all the automaker has to do at this point is simply build them - they have demand already lined up for the next several years. If Tesla can indeed pump out five thousand Model 3's a week, which Elon Musk will make sure the public is aware of if/when they accomplish this, then there really shouldn't be anything stopping them from finally turning around and profiting.

Keep an eye on the company's oft-overlooked Energy division that offers batteries and other products related to energy storage. The division already posted triple-digit growth in a single year and the technology will continue to find more and more applications. The division could be posting over half a billion in revenue per quarter by the end of this year.

The last point to consider is that Tesla may not need further cash infusion this year, which is a dramatic departure from where the firm was headed seemingly just a few months ago. Tesla needing to, yet again, raise more capital was concerning to many investors and so today's numbers should ease Tesla's investor's worries.