Tesla Growth Story Intact Despite Poor Results

Morningstar equity analysts believe it will take many years for Tesla to reach its full potential, although it should make a profit this year

David Whiston, CFA, CPA, CFE 9 May, 2018 | 11:06AM
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Tesla Model S Electric Car

Even though Tesla (TSLA) reported a loss in its first quarter results, Morningstar equity analysts think the long-term story on what Tesla can achieve in electric cars, trucks, mobility, and energy generation and storage will ultimately determine the value of the company. We are leaving our fair value estimate in place at $235 a share. We believe the stock trades on a value that, if realised, is still many years away, and so a single quarter’s results are not critical to our investment thesis.

Vehicle deliveries increased year on year by 19.7% to 29,997, with the Model 3 sedan comprising 8,182 of the total. Management continues to expect a Model 3 weekly production rate of 5,000 in about two months’ time. Tesla Energy’s revenue nearly doubled year on year to $410 million with energy storage revenue growth of 161% more than offsetting a 50% decline in energy generation megawatts down to 76 MW.

We expect a dramatic improvement in profit and cash flow soon, in either the second-quarter -or more likely - third-quarter results, due to a large jump in Model 3 deliveries later this year. Management also has high expectations as they expect Tesla to be profitable and have positive cash flow for third and fourth quarter.

Model 3 Production Ramps Up

Although we remain concerned about Tesla’s debt levels, immense key man risk, cash burn, and much more premium electric vehicle competition coming from the German carmakers and others, the looming increases in Model 3 production and the prospect of a large 1GW energy contract announcement soon give reasons for optimism. We caution, however, that euphoria over Model 3 accomplishments may be short-lived because there are many growth projects still needing investment.

Elon Musk said on the conference call that the Model Y crossover will start production in 2020. Other growth projects beyond the Model Y include autonomous taxi hailing, possibly starting in late 2019, the Tesla Semi truck starting next year, and the second generation supercar in 2020. The company did reduce its 2018 capital expenditure guidance to under $3 billion from $3.4 billion in 2017. The change is to focus more on immediate projects and management’s comments on the call suggest the Model 3 is by far the top priority, as it should be in our view.

These are all exciting projects, but it will take billions more in capital spending which we think will eventually require additional capital raises. Musk said on the May 2 call that if a stock investor does not like volatility they should not buy Tesla’s stock. We agree with that statement and given Tesla is still operating in the capital intensive car industry, the stock could fall severely in a recession. We do not see a downturn this year, but we also feel Tesla is not immune to the cyclicality of the industry despite its tech image.

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David Whiston, CFA, CPA, CFE  David Whiston is a senior analyst with Morningstar.