Published on February 7th, 2018 | by Steve Hanley0
Tesla Q4 Investor Letter Is All Sunshine & Rosy Predictions
February 7th, 2018 by Steve Hanley
Tesla earnings calls are usually filled with lots of statistics — GAAP, Non-GAAP, gross margins, and cash flow figures get thrown around like confetti at a wedding. The fun usually comes later when Elon Musk takes questions from analysts. More times that not, he lets something slip that is supposed to be kept secret, much to the delight of the audience and perhaps the consternation of company attorneys. We will cover Elon’s remarks in a separate article if necessary. For now, we will cover the highlights, as published in the company’s official letter to shareholders.
Smaller Loss & Higher Revenue
The big news for the investor class is that Tesla only lost $3.04 per share in the 4th quarter. Analysts had predicted a loss of $3.20 per share. In the arcane world of high finance, a smaller than anticipated loss is cause for celebration. Tesla says its revenue for automotive sales was up 36% compared to the same quarter a year ago, largely because of a 35% increase in deliveries. Automotive revenue for the year was up 52% over last year. The company booked $170 million from sales of zero-emissions vehicle (ZEV) credits in Q4. Last year in the same quarter, ZEV revenue was $20 million.
Tesla Model 3 Production Targets
The big question on everyone’s lips is, “When will Tesla start cranking out Model 3 cars in significant numbers?” In its letter to investors, the company addressed that issue.
“We continue to target weekly Model 3 production rates of 2,500 by the end of Q1 and 5,000 by the end of Q2. It is important to note that while these are the levels we are focused on hitting and we have plans in place to achieve them, our prior experience on the Model 3 ramp has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time.
“What we can say with confidence is that we are taking many actions to systematically address bottlenecks and add capacity in places like the battery module line where we have experienced constraints, and these actions should result in our production rate significantly increasing during the rest of Q1 and through Q2.”
Tesla is still saying it expects to ramp up production to 10,000 cars per week at some point after it gets to the 5,000 per week level. It says reservations for the Model 3 are growing, particularly as a result of glowing reviews in the press and the addition of those cars to the sales floor in several US showrooms.
The Bestest Factory In All The World
“Our goal is to become the best manufacturer in the automotive industry, and having cutting edge robotic expertise in-house is at the core of that goal,” Tesla says. “Our recent acquisitions of advanced automation companies have added to our talent base and are helping us increase Model 3 production rates more effectively. We don’t want to simply replicate what we have built previously while designing additional capacity. We want to continuously push the boundaries of mass manufacturing.”
Last week, a post on the Tesla blog described the company’s efforts to make its factories the safest in the world. “We’re taking a proactive approach to safety, which means everything from focusing on ergonomics and having the right safety equipment and controls, to ensuring everyone is constantly thinking about the hazards that can creep into everyday work and how to mitigate them.”
Tesla Model S & Tesla Model X Sales
Many people predicted the introduction of the Model 3 would cause a decline in the sales of Model S and Model X cars, but the opposite has occurred. Having the Model 3 in showrooms has increased foot traffic, which has resulted in more orders rather than fewer. Tesla is guiding 100,000 total deliveries of the S and X in 2018.
Major Software Update Coming
Tesla says, “An extensive overhaul of the underlying architecture of our software has now been completed, which has enabled a step-change improvement in the collection and analysis of data and fundamentally enhanced its machine learning capabilities. Our neural net, which expands as our customer fleet grows, is able to collect and analyze more high-quality data than ever before, enabling us to rollout a series of new Autopilot features in 2018 and beyond.”
Not sure what those new features will be just yet, but this is one bit of news from today’s announcement that should be making headlines soon.
Energy Storage Products
Tesla expects to triple its solar and battery storage business in 2018. “We’re seeing an increase in demand for Powerpack, our commercial energy storage product. With more electric utilities and governments around the world recognizing the reliability, environmental, and economic benefits of this product, it’s clear that there is a huge opportunity for us in large scale energy storage. Powerwall demand for home energy storage remains exceptionally high, with orders consistently above production levels.”
The Takeaway From Tesla
To listen to Tesla tell it, everything is coming up roses. Consider this language from the Q4 earnings letter: “At some point in 2018, we expect to begin generating positive quarterly operating income on a sustained basis. With the planned ramp of both Model 3 and our energy storage products, our rate of revenue growth this year is poised to significantly exceed last year’s growth rate. The launch of Model 3 is what Tesla had been building towards from day one.
“We incorporated all the learnings from the development and production of Roadster, Model S, and Model X to create the world’s first mass market electric vehicle that is priced on par with its gasoline-powered equivalents — even without incentives. Now we are ramping up production significantly, and as we look ahead in 2018, we are on the cusp of a step change in the world’s transition to sustainability.”
Brickbats From The Naysayers
Not everyone is singing the praises of Tesla and Elon Musk today. Seeking Alpha is a favorite of the Tesla short sellers. Its general attitude is summed up in an article published today: “Model 3 Is Shaping Up To Be Disaster That We Anticipated.” The accompanying commentary goes like this:
“Our interpretation of the public Model 3 tracking data is that Tesla may have only gotten to producing around 800 units a week by the end of January. It is possible that Tesla may claim to have hit the 1000 per week number but the evidence suggests that Tesla isn’t able to sustain this rate. The quality of early Model 3 units is poor with widespread reports of problems. More recently, it is coming to light that Tesla may be undergoing at least two different soft recalls on Model 3. The first one has to do with suspension-related issues and the second one has to do with Power Conversion System issues. While Tesla does not seem to want to call these ‘recalls,’ such a description would seem appropriate based on customer commentary.
“We expect the current crop of Model 3s to cost Tesla several thousands of dollars a unit in repair costs alone. Between the delays, quality problems, and warranty costs, we continue to maintain that the Model 3 is unlikely to produce any profit for Tesla. Our view remains that the car is beta quality and not production ready.”
That comes from a writer named “EnerTuition,” on a site that has admittedly had Tesla doomsday articles running regularly for several years.
It’s hard to reconcile the sunny skies envisioned by Tesla with the gloomy horizon that EnerTuition sees. Perhaps the best answer is that Tesla stock is up more than 10% so far this year, despite the steep selloff in the broader markets. Clearly, lots of people are willing to bet their money on Elon and Tesla. Conventional wisdom is no guarantee of commercial success, however. The real question is what will the earnings report for the 4th quarter of 2018 look like? If only we knew the answer to that question today.