Can Tesla Inc stock continue to rally in spite of rising uncertainties?
Tesla Inc (NASDAQ:TSLA) yesterday reported its Q4 and FY 2016 earnings. The Palo Alto, California, based company was reporting its first earnings after the $2 billion acquisition of renewable energy company SolarCity (NASDAQ:SCTY). Tesla reported a wider than expected loss but a beat on revenues. The electric car maker said it lost 69 cents a share against analyst estimates of a loss of 53 cents a share. On the revenue front, the company reported $2.29 billion in revenues. Analysts were looking for a revenue of $2.19 billion. The response of Tesla stock to the earnings was comparatively muted. Tesla stock gained by around 1.5% in the after hours. The movement in the stock was much lower than many were expecting. Tesla options had priced in a movement of 6% in either direction (which was higher than usual 5% move).
Tesla Inc's gross margin will bounce back.
Tesla's automotive revenue grew by 78% for the quarter to $1.99 billion. For the full year 2016, automotive revenue was up by 70%. Tesla's total revenue (including solar energy and storage) grew by 73% for the full year. On the profitability front, Tesla's gross margin saw a big decline on QoQ basis. Gross margin slipped from 27% in Q3 2016 to 19% in Q4 2016. There were a couple of reasons for this massive decline. Tesla Inc recognized lower ZEV credits in the fourth quarter. Also, the company had to postpone the recognition of revenues from autopilot upgrade to Q1 2017. Tesla Inc expects Q1 2017 gross margins to bounce back to Q3 2016 levels. The GAAP EPS improved from a loss of $2.44 in the same quarter last year to a loss of 78 cents per share.
Tesla Inc reaffirms Model 3 launch date.
Model 3 remained the main focus of the earnings. Many skeptics have questioned Tesla's ability to abide by the launch plan. In its letter to shareholders, Tesla Inc reaffirmed its commitment to start the limited production of Model 3 by July. However, Tesla is not sure how many cars it can produce. Tesla refused to give the guidance for full-year deliveries like it used to do previously due to the uncertainties around the production of Model 3. Instead, the company provided guidance for the first half of the year. Tesla expects to deliver 47,000 to 50,000 Model S and X units in the first half of 2016. These numbers represent 61% to 71% growth in vehicle deliveries.
Tesla expects to produce around 5000 Model 3 sedans per week in Q4 2017, ramping it up to 10,000 units of Model 3 in Q1 2018. With the current guidance, Tesla will produce lower units of Model 3 than previously announced. Earlier CEO Musk had said that Tesla would produce 100,000 to 200,000 Model 3 cars in 2017. At 5000 units a week, Tesla will produce 65000 units in Q4, while Q3 production will be much lower. In the best case scenario, Tesla will manage to reach the lower end of its target.
Tesla is planning to approach capital markets again.
In our earnings preview, we had discussed the possibility of Tesla raising funds from the capital markets. Tesla had earlier said that they are not likely to approach the market to raise funds in Q1 2017. However, given the requirement for capital, many on the Wall Street expected Tesla to take advantage of the recent rally in the stock price and go for a secondary offering. When asked about the possibility of raising funds from the market during the earnings call, Mr. Elon Musk said that Tesla could consider approaching the market to reduce risk. According to Tesla, it needs to invest $2-$3 billion before the production of Model 3 begins.
Tesla currently has around $3.3 billion in cash on its books, however, the company also has around $5.8 billion of long-term debt. Also, the company is heavy cash burner. In the most recent quarter, Tesla reported an operating cash flow of negative $449 million and free cash flow of negative $1 billion. Given the requirement for capital investment, high debt levels and continued outflow of cash, Tesla is likely to approach the market sooner, most likely for a secondary offering of equity, which could be a dampener for TSLA stock.
Should you buy Tesla stock after the earnings miss?.
Tesla is a high debt company burning millions of dollars in cash every year. The company can go for a secondary offering to finance its capital investments. The integration of SolarCity will also increase the uncertainty in the short term. Given the volatility, current valuation and challenges, Tesla stock remains a risky bet. However, these concerns are likely to take a back seat if Tesla is able to deliver on it Model 3 promise. For Tesla, 2017 is mostly about getting its Model 3 out running. The stock price will be driven by the progress on the Model 3 front. For now, the stock is likely to go up.