- Tesla topped analysts estimates of Q3 delivery numbers and gave a strong Q4 outlook.
- Strong delivery numbers will help Tesla raise much-needed funds.
- Strong delivery numbers will drive Tesla stock going into Q3 earnings, but risks still persist.
The last couple of months have been a rocky ride for Tesla (NASDAQ:TSLA) investors as the stock plunged more than 10% on a slew of bad news, be it the safety concerns surrounding Tesla’s autopilot mode, the liquidity crunch or its decision to acquire SolarCity. But after a long wait, there are some good news to cheer up Tesla investors. On Friday Tesla stock gained 1.6% after the company reported that its autopilot was not to blame for a crash in Germany.
Later, the company posted strong delivery numbers and guided for even better numbers in Q4. This is a really good news for Tesla investors, as the stock moves more on delivery numbers than on earnings. In a press release on October 2nd Tesla noted:
Tesla (NASDAQ: TSLA) delivered approximately 24,500 vehicles in Q3, of which 15,800 were Model S and 8,700 were Model X. This was an increase of just over 70% from last quarter's deliveries of 14,402. Our Q3 delivery count should be viewed as slightly conservative, as we only count a car as delivered if it is transferred to the customer and all paperwork is correct.
Tesla also reported that production rose to 25,185 vehicles in Q3, an increase of 37% from Q2 production of 18,345. And while maintaining its H2 2016 target of 50000 units, it said that Q4 will be better than Q3. The company had missed its delivery estimates in last two quarters. Tesla's sales mix is also improving, with the ratio of lower end Model S cars sold per Model X declining from 2.1:1 in the last quarter to 1.8:1 in this quarter. This is likely to help Tesla's profitability.
Cash Flow Needs
Tesla needs to post a strong Q3 result as the company is planning to approach investors to raise $1.5 billion. And after a few bad quarters and continued losses from operations, many investors are reluctant to invest in Tesla. Tesla's decision to acquire SolarCity made matters even worse. Elon Musk knew the importance of a good Q3 to convince investors. In an email to Tesla employees, Musk said: "We are on the razor’s edge of achieving a good Q3, but it requires building and delivering every car we possibly can,". And going by the looks of it, Tesla may manage to post a good quarter. In an email, a few days back Musk has said that Q3 is “likely to be the best ever in Tesla history.”.
Tesla is completely reliant on the market for its investment needs. It has approached the market on regular basis to shore up its finances as Tesla doesn't have internal resources to do it. The company has been burning cash quarter after quarter. In 2015 Tesla burned more than $300 million cash in operations with free cash flow coming in at -$2.1 billion.
Aggressive Sales Strategy
To ensure that it meets its delivery targets Tesla had engaged in aggressive selling. According to Brad Erickson, an analyst at Pacific Crest Securities, Tesla has been aggressively discounting its Model S in the US to boost its Q3 delivery numbers (discounting is against Tesla's policy). He reported that "Tesla has been employing a deeper discounting formula to drive sales of inventory models, with all offers expiring this Friday, the last day of the quarter.” So the question is, how much of an impact will aggressive selling have on Tesla's cash flow and profitability. As Elon Musk had pointed out in his email, profitability is crucial for Tesla to raise money.
"Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”. That would be amazing! "
According to Musk Tesla's GAAP profit numbers were few percentage points into negative towards the end of August. And Musk was confident that Tesla can push the number to positive territory.
Tesla stock is likely to gain after the company reported strong delivery numbers. Tesla stock is driven more by delivery numbers than by the earnings. Tesla has also posted a strong Q4 outlook. With good Q3 numbers, Tesla may manage to raise funding, which is very critical for its continued operations at decent terms. But the medium term risks still remain. The competition in the EV segment is likely to hot up, which may impact Tesla's margins going forward. Also, there is uncertainty surrounding the acquisition of SolarCity and the Altman Z score shows a high risk of bankruptcy risk, especially if SolarCity is merged with Tesla. For now Tesla stock continues to be a risky bet in the medium term.
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