Tesla Earnings Misses Q3 2015 Estimates But Stock Swings Higher

  • Tesla has reported third quarter results that missed both top and bottom line estimates.
  • Tesla's losses continued to widen due to high development costs.
  • Tesla shares, however, made double-digit gains after the company issued upbeat guidance.

Leading electric vehicle manufacturer Tesla (NASDAQ:TSLA) has reported third quarter fiscal 2015 earnings that missed on both top and bottom line estimates, but the company’s shares gained 11% in after-hours trading, after the company issued upbeat sales guidance. Tesla reported revenue of $1.24 billion, good for 33% Y/Y growth but came short of consensus estimates by $20 million. The company’s losses, continued to widen: Tesla reported net loss of $229.9 million, or EPS of -$0.58, as the costs to launch Model X bit a chunk off the company’s bottom line. Tesla earnings missed estimates by $0.08, and marked the 10th consecutive quarter that Tesla reported a loss. The company’s gross margins remained relatively unchanged at 22.8%, roughly in line with expectations.

The investing world, however, cheered when the company announced that it would deliver 17,000 to 19,000 during the fourth quarter, a clear sign that Model X production would ramp up significantly. Tesla’s sales target for the fourth quarter implies the company is on course to deliver 50,000 to 52,000 vehicles for the full year.

Tesla produced 13,091 vehicles during the third quarter and delivered 11,603 units, good for 49% Y/Y growth, including its first Model X vehicles despite having shut off its production plants for retooling. The company said that the retooling its assembly line allowed it to realize a 35% increase in throughput, which will come in handy if the company is to achieve its fourth quarter production target.

Tesla cautioned that the monopost second-row seats in the Model X remains a big challenge due to manufacturing difficulties, and might negatively impact the company’s ability to meet its production targets. The EV manufacturer brought production of the seats in-house to try and speed up the process.

High Cash Burn rate and Share Dilution

One glaring point of concern in Tesla earnings report was the huge $450 million cash burn during the quarter, mainly due to development costs for Model X and the giant Nevada battery factory. To support the high cash burn rate, Tesla issued new shares worth $750 million in a bid to shore up its cash reserves. That represents roughly 3% of Tesla’s outstanding share count at current prices.

The company might, however, not be done yet with new share sales. Although Tesla’s cash in  hand of $1.4 billion by the end of the quarter was better than the $1.2 billion it held by the end of the June quarter, it was nevertheless far below the $2.37 billion the company held by the end of third quarter 2014. Tesla’s ongoing Model X and Model 3 development costs are therefore likely to lead to escalating losses in the coming quarters as well as continued share dilution through new issues. This is likely to keep Tesla share gains rather muted over the short-term.

Tesla Stock A Long Term Bet?

But the long-term outlook for the company remains good. Tesla has said in the past that it needs to ramp up annual production to 500,000 units if it is to become profitable. At current growth rates, Tesla is likely to hit that mark in about 6 years. Moreover, battery costs, the biggest cost components for electric vehicle manufacturers, have been rapidly coming down. This will allow EV manufacturers like Tesla to pass on the cost savings to consumers in the form of cheaper cars, and in the process help to make EVs more mainstream. Although profitability is not anywhere in near sight, Tesla shares are likely to continue making good long-term gains as long as the company can continue demonstrating a clear path towards growing its production.

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