Earnings Review: Tesla Reports Positive Cash Flow In Core Operations But Ancillary Expenditures Continue To Mount

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Tesla Motors (NYSE:TSLA) announced its fourth quarter and full year results for the fiscal year 2015. The Silicon Valley based auto maker announced record deliveries for the year of its premium sedan, Model S. New vehicle sales increased by 76% year over year resulting in a $179 million positive cash flow from core operations for the full year. [1] However, on an aggregated basis, the company is still in a loss position, due to ongoing expenditures related to the production of Tesla’s new premium SUV (Model X), the construction of the Giga Factory, the production of the company’s energy storage product (Tesla Powerwall), and other expenditures related to product testing, research and development and testing. Still, there were several pointers towards the success of the Model S, which now holds a 25% market share in the premium sedan market in the U.S.  There are early signs, moreover, of strong demand for the Model X. [2] The company is also set to unveil a prototype of the Model 3, its mass market electric car, on March 31. [2] Additionally, management posted encouraging guidance for a number of year-ahead metrics, including: 1) an improved gross margin for the Model S; 2)  non-GAAP profitability for the full year and GAAP profitibiity for the fourth quarter;  3) a 60%-80% increase in new vehicle sales for 2016; and, 4) a March 31st unvieling of the Model 30 (as noted) with production and deliveries to follow in late. [2] Below, we take a look this quarter’s results and the outlook for the company going forward.

We have a price estimate of $170 for Tesla, which is about 20% above the current market price.

Cash Flow Positive In Core Operations

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Tesla’s core operations related to the Model S can be defined as the production and distribution of the vehicle, and sales of the premium sedan to its leasing partners. This excludes costs incurred in the build out of service centers, production facilities, stores and charging stations. Excluding all these costs, Tesla generated $179 million in cash flow this quarter, compared to losses of $40 million and $41 million in the previous two quarters.

As highlighted above, in order to support the volume of its vehicles, Tesla has to build out an entire infrastructure. The company does not sell its vehicles through dealerships. Instead, it sells through its own stores and offers after-sales servicing through its own service centers. Additionally, the company has to make charging stations where Tesla vehicle owners can charge their vehicle batteries. Ongoing investments in this infrastructure means that Tesla burns cash a lot faster compared to a traditional auto maker. However, these investments are necessary for its business and can result in significant advantages in the long run.

Strong Demand For Vehicles

In Q4, Tesla’s global vehicle deliveries improved 76% compared to the final quarter of the previous fiscal year. The premium sedan Model S has been gaining market share in the four-door premium sedan segment in the U.S. In fact, it was the only vehicle which posted a year-on-year sales gain in this segment. Competitors such as Audi A7 and A8, BMW 6-Series and 7-Series, Mercedes CLS-class and S-class, Lexus LS and Jaguar XJ all posted sales declines, with  overall segment sales declining by 0.8%. Tesla Model S, which now has over 25% market share in this segment, grew its sales by over 50% in the full year. [2] This is remarkable in a year in which gas prices were so low because it means that people value Tesla’s vehicles for their superior performance and capabilities as opposed to their ability to save on fuel and maintenance costs. The total number of vehicle deliveries is still low because Tesla does not have stores in many locations, partly due to political opposition to the idea of cutting out dealers. Moreover, the company is still only expanding in several geographies such as China, Mexico and Western Europe.

Meanwhile, the company is still only ramping up its production of the Model X. According to management, reservations of the SUV grew by 75% compared to the prior year. They have previously indicated that it will take until the second half of 2016 to fulfill the orders already in place for the vehicle. Additionally, the company guided that production rate for the Model X can be expected to reach 1,000 units a week in the second quarter of fiscal 2016. [2]

Margins

In Q4, automotive gross margin was 19.2% on a GAAP basis and 20.9% on a non-GAAP basis, excluding revenue generated from ZEV credits ($8 million). [2] These margins were affected by one time costs associated with the development of the Model X and non-recurring impairment charges related to the elimination of obsolete parts and painting equipment used in Model S production. Excluding these costs, gross margin on a GAAP basis was 23.7% for the quarter and non-GAAP margin was 25%. [2]

In 2016, the company expects Model S margin to improve to 30% and the Model X margin to come in at around 25%. Additionally, operating expenses are expected to increase by 20% and the company guided for capital expenditures of $1.5 billion for the full year. Tesla plans to use this money to start cell production at the Giga Factory, open about 80 retail locations and service centers and 300 new Supercharger locations.

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Notes:
  1. Tesla Q4 Shareholder Letter, Tesla Investor Relations []
  2. Ref: 1 [] [] [] [] [] [] []