- Tesla has delivered Q4 2014 results that failed to meet analysts' estimates.
- Tesla posted a huge earnings miss that was orchestrated by a ramp-up in Model X production.
- Tesla, however, issued an upbeat 2016 delivery guidance.
- Is Tesla stock a worthwhile long-term investment? Tesla stock price is down 40% YTD.
EV manufacturer Tesla (NASDAQ:TSLA) has reported Q4 2015 results that missed both top and bottom line expectations. Tesla reported fourth quarter revenue of $1.75B, good for a healthy 59.1%Y/Y growth but $50M below the consensus estimate by Wall Street. Tesla reported non-GAAP net loss of $0.87 per share, representing a huge 569% Y/Y increase compared to Q4 2014 non-GAAP net loss of $0.13 per share. On a GAAP basis, Tesla reported net loss of $320M, or EPS of ($2.44), a 184% Y/Y increase compared to GAAP EPS of ($0.86) posted in Q4 2014. The company’s non-GAAP EPS for the fourth quarter missed Wall Street estimates by a mile--$0.99 below analysts’ consensus estimates.
For the full year, Tesla reported revenue of $5.29B, up 47% Y/Y; non-GAAP net loss of ($2.30) per share compared to a net income of $0.14 per share posted during 2014. On a GAAP basis, Tesla finished 2015 with a net loss of $6.39 per share compared to a loss of $2.36 per share posted in 2014. It’s therefore quite clear that Tesla’s losses have quickly ballooned, especially in the fourth quarter due to Model X production costs.
Meanwhile, Tesla’s Q4 2015 gross margins took a journey south as per expectations, again due to Model X production costs. Tesla reported gross margin of 20.0% during the fourth quarter compared to 26.7% during Q4 2014, a considerable 670 basis point contraction. Automotive gross margin during the quarter clocked in at 20.9% compared to 22.0% during Q4 2014.
One bright spot in Tesla Q4 2015 Earnings report was the company’s free cash flow that moved from the red to the black for the first time after Tesla generated free cash flow of $179M during Q4. Although Tesla attributed this positive trend to a 50% Q/Q increase in vehicle deliveries, it’s also worth noting that the company’s capital expenditure increased only 11% Y/Y to $411M during the quarter, much slower than top line growth.
It was Tesla’s strong 2016 delivery guidance that, however, saved the day for the company and Tesla stock. Tesla said that it expects to deliver 80k-90k Model S and Model X vehicles in 2016, representing a healthy 68% Y/Y increase during the year and a considerable acceleration compared to 51% growth in deliveries posted by the company in 2015. Tesla delivered ~40k Model S vehicles in 2015. Assuming the Model S deliveries grow ~45% in 2016, then the company projects to sell as many as 20k model X vehicles in 2016.
Meanwhile, the company said that it expects its gross margins to expand as the year progresses helped by improving margins on Model X and cost reduction for Model S. Tesla sees Model S gross margin approaching 30% by the end of 2016 while Model X gross margin is expected to hit 25% over a similar timeline.
The upbeat guidance helped Tesla shares to stay afloat and even gain 1.5% in after-market trading despite the big earnings miss.
Regarding the touchy subject of how Tesla hopes to continue funding its growing capital expenditure, the company said:
"We plan to fund about $1.5 billion in capital expenditures without accessing any outside capital other than our existing sources that support our leasing and finished goods inventory."
So investors can rest easy knowing that the company has no further plans to continue issuing secondary shares to finance its operations. A number of Tesla bears have been warning that the company runs a serious risk of facing a cash crunch due to its growing productions costs. One such analyst is Barclays who sounded the alarm by saying Tesla might burn through as much as $11B primarily due to Model 3 production-related costs:
‘‘Tesla will continue to burn through lots of cash in its quest to become a bigger car maker, and Wall Street may be underestimating how much spending remains ahead. TSLA does not boast a strong track record in spending efficiently, and its business strategy will keep it a capital intensive company.’’
‘‘If TSLA does not become more efficient in making its planned Model 3 mass market car, the company runs the risk of running out of money to invest in software, which is essentially what truly differentiates the company from other EV manufactures.’’
But so far Tesla is doing well on both counts. The company managed to become cash flow positive for the first time despite high Model X production costs, and also launched Autopilot during Q4 that the company will be continually enhancing using over-the-air updates. Autopilot is Tesla’s new autonomous driving software that boasts features such as perpendicular self-parking as well as Summon capability which allows the driver to park or unpark the vehicle even when outside the car. Summon can even open and close pre-programmed garage doors.
Meanwhile, the company also launched Tesla Energy after commissioning production at its Gigafactory in Q4. The company’s Powerwall and Powerpack products are now in full production at the factory, with Tesla saying that Powerwalls are being currently built in Germany, Australia, and the U.S. Tesla talked about the new factory creating cross-selling opportunities by potentially doubling customer inquiries about its vehicles. But perhaps the brightest part about Tesla Energy is that Tesla said that it had already managed to achieve positive gross margins immediately following its launch, and it is expected to add positively to the company’s cash flow in 2016.
Tesla only gave passing mention to Model 3 by saying the vehicle will be unveiled in late March 2016 with production and delivery slated for late 2017. An earlier report said that customers will be able to pre-order Model 3 at just $35k starting March as I have discussed here.
Tesla’s huge earnings miss can be chalked up to Model X production ramp during Q4. The company’s upbeat 2016 guidance as well as the planned unveiling of Model 3 shows that Tesla remains well on course to achieve its target to become a mass manufacturer of EVs before long. Tesla stock is down 40% YTD and now might be a good time to load on the shares for the long haul.