Tuesday 23 July 2019 2:37 pm Markets Talk

Charging up ahead of Tesla earnings - Q3 profit target to go?

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Production has improved, but can Tesla manage to stick to its guidance to return to profitability in Q3?

Again we are looking at whether the company has borrowed from Peter to pay Paul by taking on additional costs in order to hit delivery targets. We also note reports that Tesla employees were pressured to take shortcuts to achieve the production targets. 

Last month CEO Elon Musk said deliveries in the second quarter hit a record 95,200 cars, well ahead of the 91k expected by Wall Street. It was 50% ahead of the anaemic growth seen in Q1 and beat the previous quarterly best of 90,700 set in the final quarter of 2018. 

Weak first quarter

Q1 earnings were a bit of a car crash. The firm reported a net loss of $702m, equivalent to $2.90 per share – well south of the $0.69 consensus expected. Revenues were also a miss – coming in at $4.54bn against the $5.2bn expected. The company does not expect to return to profitability until Q3, but even this could be a stretch. We should expect management to have greater visibility now and if they stick to the Q3 target it would be a positive for the stock. 

Net cash fell to $2.2bn, down $1.5bn from the end of 2018, largely down to the repayment of a $920m convertible bond.  The effect of the cut to federal tax credits paid to buyers of its vehicles on Jan 1st has had a clear impact. Sales revenues were down 41 per cent from the fourth quarter.  This trend is unlikely to have improved much in Q2.

Price instability

Going forward, we noted three months ago that the erratic pricing policy of the Model 3 is a worry – can Tesla make it at a price that is acceptable to consumers but is still profitable? Last week we heard that Tesla had once again rejigged its pricing and options across the entire range.  

After Q1, Tesla reaffirmed prior guidance of 360,000 to 400,000 vehicle deliveries in 2019, representing an increase of approximately 45 per cent to 65 per cent compared to 2018. However as previously noted, at the lower end it would be flat on the second half of last year, whilst at the top end it would mean growth in sales of 10 per cent, which is hardly inspiring. Given the Q2 performance management are likely to stick to this guidance. 

Analyst consensus

Our MARKETS.COM analyst recommendation tool suggests an average price target of $262.64, just about 3 per cent above where TSLA was trading on Tuesday. Of course Tesla splits opinions and the average masks a very wide range from $140 to $500 across the 26 Wall Street analsyts covered.