Will Tesla Turn The Corner In This Year?

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Tesla (NYSE:TSLA) published its Q1 2018 results on Wednesday, posting its largest-ever quarterly loss, weighted down by costs associated with the ramp-up of its first mass-market sedan, the Model 3. However, the company remains optimistic about its prospects, indicating that it could achieve profitability on a GAAP basis by the third quarter, while also noting that it could become cash-flow positive during the second half of the year. Below, we take a look at some of the key takeaways from the earnings and what lies ahead for Tesla.

We have created an interactive dashboard analysis which outlines our expectations for Tesla over 2018. You can modify the drivers (in blue dots) to arrive at your own estimates for the company’s revenues and earnings.

Tesla’s cash burn accelerated, with free cash flow standing at negative $1 billion during the quarter, compared to negative $277 million in Q4’17, excluding the cost of solar systems for its energy business. However, despite the increased cash burn, the company remains confident that it will not need to raise any additional debt or equity, as it expects to turn cash flow positive in the second half of this year, driven by lower capital expenditures ($3 billion projected for 2018, versus $3.4 billion in 2017) and the manufacturing ramp of its Model 3 sedan.

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Tesla’s ability to produce the Model 3 sedan profitably at scale is viewed as the most important lever of a financial turnaround for the company. Tesla said that it hit a production run rate of 2,270 Model 3 sedans per week in April, while noting that it plans on building about 5,000 Model 3 vehicles per week in about two months. Tesla has missed production estimates in the past, as the manufacturing process for the vehicle deploys more automation compared to higher-end vehicles, making it challenging to scale up in the early stages of the process. However, the company could see a relatively exponential ramp as the issues are ironed out.

Tesla’s adjusted automotive margin, excluding its ZEV credits, came in at 18.8% during Q1, marking an improvement over the 13.8% seen in Q4, although it was well below the year-ago levels of 27.8%, due to costs associated with the ramp-up of the Model 3 sedan. This is partly due to higher labor intensiveness in some areas of manufacturing, where the company has had to reduce automation temporarily. Tesla said gross margins on the Model 3 were slightly negative for the quarter, indicating that they would be close breakeven in Q2. The company continues to target gross margins of about 25% for the sedan in the long-run. These margins could be achievable, considering that Tesla has been seeing higher than expected average selling prices for the vehicle. Moreover, greater automation and economies of scale could also help the company.

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