Tesla is at a crossroads. For more than a decade, it lost money, teetering on the edge of bankruptcy, even as it made cars people loved. Now, Tesla has proven it can grow and make money at the same time, a new concept for the electric carmaker.
Tesla saw its stock surge after reporting the company’s third-consecutive profitable quarter (pdf), a first for the company that surprised analysts during its first quarterly earnings report on April 29. The news sent the stock up 9% in after-hours trading.
CEO Elon Musk told investors the company was pressing ahead with growth plans despite the Covid-19 pandemic: 500,000 cars per year, new autopilot features, the ramp-up of the Model Y crossover, and expanding factories in Berlin and Shanghai. Despite shutdowns that have slowed production and deliveries, Tesla managed to eke out a $16 million profit on $6 billion in sales. And while the coronavirus sent its free cash flow into negative territory this quarter, sales of the massively popular Model 3 and Model Y lines remain strong, and a recent fundraising round leaves the company with a comfortable cash pile.
That’s left it in an enviable position. Tesla is poised to weather a moribund global auto market, perhaps cementing its lead in the global race for electric vehicles. Quartz pulled together key metrics from Tesla’s most recent earnings report to give a snapshot of Tesla’s health and prospects.
Nothing sets Tesla apart like its valuation. Ford and GM once towered over Tesla. Once it began its slow rise after 2017, it quickly exceeded all other carmakers; today, it’s valued at $147 billion. Only Toyota, with a market cap of more than $200 billion, is more valuable.
Musk has never been shy about why. Most automakers have been building roughly the same cars, with a few modifications, for nearly a century. Tesla was the first, and usually only, firm to venture into batteries, solar panels, and autonomous software with a different vision of the future. Those ambitions nearly bankrupted the company more than once. But they might also pay off. In 2017, Musk tweeted “Tesla is absurdly overvalued if based on the past, but that’s irrelevant. A stock price represents risk-adjusted future cash flows.”
Tesla says it has the capacity to produce at least 500,000 vehicles in 2020, something analysts thought was overly ambitious before yesterday’s earnings. But Tesla stood by its guidance suggesting its factories could churn out half a million of its Model 3 sedans and Model Y crossovers, while continuing steady production of its luxury Model X SUV and premium Model S sedan.
Few believed a startup like Tesla could ever reach the production volumes of the majors. It still has a long way to go; GM produced more than 7 million cars last year. But it’s on its way.
Free cash flow
Tesla has been generating cash thanks to the wild popularity of its Model 3. That didn’t hold this quarter. Free cash flow, the money it generates from operations after accounting for spending on new facilities and growth, fell to -$895 million, a mirror image of the previous quarter. But Tesla attributed the dip to suspension of operations around the world due to the coronavirus, and increased spending Model Y ramp-up at its Fremont and Shanghai factories. If the Model Y is anywhere near as popular as the Model 3, it will be a money machine.
Turning a profit is a rare occurrence at Tesla. Pulling it off three quarters in a row is unprecedented. In this earnings report, Tesla squeaked by, recording a $16 million profit (while relying on hundreds of millions of dollars in zero emission credits to push the balance sheet into the black). That may have been mostly to show Wall Street it could, but Tesla’s ability to stay profitable is now on much firmer ground. Investors may be more forgiving of bigger deficits in the future as it seeks to ramp up production of multiple new vehicles.
Like generating profits, Tesla has never been good at holding on to cash. But it now has more than it has ever had in the past. A $2.3 billion equity fundraise in February gave the company an even larger cushion to finance expansion and survive a future downturn like today’s pandemic.
Tesla’s ambition has driven its stock price up far past Wall Street expectations. Consensus estimates from Sentieo calculate analysts’ median target at $430 per share. On April 29, Tesla’s stock had soared above $800.
Serious risks remain: Customers may forgo expensive electric vehicles as the economy contracts and oil grows even cheaper. Promises of full self-driving are still viewed with extreme skepticism. And Musk still can’t resist lashing out at perceived slights and enemies. On the latest earnings call, he called the stay-at-home orders in the US “fascist” for forcing people indoors and shuttering Tesla’s Fremont plant. Tesla has set expectations so high, it could easily disappoint if it doesn’t execute its growth plans almost perfectly.
But Tesla seems to have turned a corner. Its new lineup, which starts around $35,000, has consistently defied dips in the auto market with strong sales. Margins are rising, and costs are relatively stable. Factories around the world are being built on schedule, and Tesla even delivered its Model Y early. The assembly line snafus with the Model X and Model 3 that nearly sank the company are nowhere to be seen.
Tesla is now looking ahead at the release of the heavy-duty Tesla Semi, the Roadster sports car, and the Cybertruck, a truck likely to be built at a factory in the US midwest.
The coronavirus has changed little so far, Musk said on the earnings call, according to a transcript from the investment research firm Sentieo. “We came to the conclusion that the right [path] was actually to continue to expand rapidly, continue to invest in the future in new technologies, even though it is risky,” he said. For Tesla, this year seems like the end of the beginning.