Morningstar

We Expect Improvement From Tesla

We are giving Tesla the benefit of the doubt and maintaining our fair value estimate.

Securities In This Article
Tesla Inc
(TSLA)

We expect Tesla's TSLA first-quarter loss to be the low point for 2019, and we see no reason to change our fair value estimate. Adjusted diluted EPS of negative $2.90 badly missed consensus of negative $0.69. Revenue grew 33% year over year but fell 37% from the fourth quarter, missing consensus, due to Tesla's previously disclosed sequential delivery decline of 31%. We reiterate our April 4 note comments: For now we are giving Tesla the benefit of the doubt that the first-quarter deliveries were a function of problems introducing the Model 3 to Europe and China rather than a demand shortfall. We also said Tesla needs to adjust operations so it can produce to meet demand in all geographic markets at the same time; otherwise it will never scale, in our view. In the first quarter, Tesla produced in batches for geographic locales--what it calls the "wave" approach--so the U.S. got starved for Model 3s in the first half of the quarter so Europe and China could be supplied. With all product coming from California, the long shipping times caused half of first-quarter deliveries to occur in the last 10 days of March. The company is starting to unwind the wave now, but we think realistically it just needs more capacity, which is why having the Shanghai Gigafactory plant on line late this year is important.

GAAP free cash flow burn of $919.5 million was slightly better than $1.05 billion in the prior-year quarter but far from the roughly $900 million positive free cash flow in each of the third and fourth quarters of 2018. The cash balance fell by $1.5 billion from Dec. 31 to $2.2 billion. We suspect the market was expecting something worse for cash on hand, and if management can deliver on curbing the negative working capital impact of the wave, we are not worried about cash for 2019. Management expects positive free cash flow for each of the remaining 2019 quarters, a significantly reduced second-quarter loss versus the first quarter, and third-quarter profitability.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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