Analysts: Money vortex – Tesla has two ways to stop its massive losses

Aurel Dragan 05/09/2018 | 11:14

Tesla (symbol TSLA) reported a quarterly loss of USD 742.7 million on August 1, equivalent to a – USD 3.06 per share, 85 percent higher than the loss recorded in Q2 2017 and below the market expectations of – USD 2.78 per share. In total sales, TSLA recorded an increase of 43 percent compared to Q2 2017 to USD 4 billion, surpassing the market expectations of USD 3.8 billion, as we can see in the analysis made by Tradeville. 

Total sales on the automotive segment, including revenues from car sales as well as rental income, registered a 47 percent increase in Q2 2018 to USD 3.36 billion. Their positive evolution was driven by sales over 18,400 model cars 3. In Q2 2018 the company produced 53,339 cars from which it delivered 22,319 Model S and Model X and 18,449 Model 3 cars, totaling 40,768 cars delivered.

In terms of energy revenues, they increased in Q2 2018 compared to Q2 2017 by 31 percent to USD 374.4 million, as a result of the increase in the amount of solar energy generated but also due to the increased demand for storage equipment energy.

In T2 2017, Tesla recorded operating expenses of USD 4.6 billion, up 50 percent from Q2 2017. Expenditure operational forces tend to grow faster compared to revenue, which is a sign of doubt the company’s sustainability. Although Tesla fired approximately 9 percent of employees to decrease costs, the expenses have risen in Q2 2018 with 53 percent while total revenue rose 43 percent, a trend that can be seen in the past (over the last five years company revenue increased 631 percent while operating expenses increased by 761 percent). Increase in spending operating costs is mainly due to the increase of COGS by 59 percent to RON 3.38 billion as a result of the increase in production and at the same time increase in G & A expenditures by 40 percent to USD 750.8 million (the increase in G & A expenditures is due to higher reorganization.

The negative financial result in Q2 2018 was USD 107.6 million, down 26 percent from Q2 2017, as a result of the increase interest expenses by 51 percent to USD 163.6 million.

Improved production capacity

Tesla continued to improve its production capacity, reaching a production of 7,000 units per week (5000 Model 3s and 2000 Model S / X units) in July. The management said that in Q3 2018, it expects the production to record a constant rate of 7,000 units a week, and at the end of August to reach the figure of 6000 units Model 3. The company estimates that in Q3 2018, total car production Model 3 will reach 50000-55000 units.

Gross profit margins on business segments deteriorated compared to Q2 2017. Generally, the quarterly gross profit margin reached 15 percent, down by about 35 percent compared to Q2 2017, their evolution being determined by the mix of vehicles in the portfolio that led to a decrease in profit margins as production model 3 grew.

Profit margin on upward trend

Compared to the last three quarters, the profit margin on the auto sales segment showed an upward trend. In Q2 2018, the gross profit margin on the car sales segment was 18.9 percent, compared with 18.3 percent in Q1 2018, 16.9 percent in Q4 2017 and 15.4 percent in Q3 2017. For the first time in Q2 2018, the profit margin on Model 3 was positive, reaching 3 percent.

In Q2 2018, Tesla recorded a negative cash flow of USD 129.7 million, down 35 percent from Q2 2017. As far as cash flow from financing activity is concerned, it decreased compared to Q2 2017 with 62 percent to USD 770.3 million, analysts say there is a possibility that Elon Musk will carry out a new capital-raising operation. Compared to Q2 2017, in Q2 2018 the cash flow from investment activity declined by 31 percent to USD 1.4 billion, driven by a 95 percent decline in M ​​& A activity to USD 5.6 million, while reducing solar energy with 66 percent to USD 140.4 million.

Tesla’s interest costs have increased considerably compared to previous quarters, mainly due to the appreciation of the LIBOR reference rate at which most funding instruments are indexed. This is one of the main factors explaining the increase in interest expense in Q2 2018 by 51 percent to USD 163.6 million. It is worth mentioning that the TSLA closed Q2 2018 with a financial debt of approximately USD 11.6 billion, and in the following quarters there are some loans (both bank credits and bond issues) reaching maturity.

However, it seems that Tesla Model 3 is the best-selling sedan in the US at the moment. Recent estimates show that Tesla was able to sell 13,500 Model 3, equivalent to the sales of the next 3 competitors.

After reporting quarterly results, TSLA shares reached + 11 percent in after-hours trading.

After a long time that TSLA’s shares were under the pressure of sellers, Elon Musk’s prospects for future results surprisingly surprised the market. Estimates provided by the company’s management:

  • Elon Musk expects Tesla to become profitable in the second half of 2018;
  • The Gross Profit Margin for Model 3 will grow in 2018 to 15 percent in Q3 and 2018 to 20 percent in Q4;
  • Increasing Model 3 production from 5000 units per week to 6,000, starting in late August;
  • The company expects sales of S and X models to reach 100 thousand units in 2018.

Important events

  • In July, Tesla signed an agreement with the Beijing authorities to build a factory in Shanghai to produce the new Model 3 sedan and recently started hiring for the new “Gigafactory”, China being the largest electric cars;
  • The Saudi Fund has acquired a stake in Tesla valued between USD 1.9-3.2 billion (equivalent to 3 – 5 percent);
  • The sale of Tesla shares was halted yesterday following an ad hoc announcement by Elon Musk regarding the possible delisting of the company for a price of USD 420 / share;
  • Between 1-7 August 2018, TSLA’s shares appreciated by more than 26 percent on the basis of CEO Elon Musk’s statements;
  • Since the beginning of the year, TSLA shares have recorded YTD returns of 19.48 percent, compared with YTD returns of 14.2 percent recorded by the Nasdaq Composite Index.
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