Tesla Earnings Crush Estimates — Elon Was Right, Can Self-Finance Massive Growth

Tesla’s continued positive cash flow and $5.3 billion in cash, even while quickly expanding both its product line and its manufacturing capabilities, and growing its leasing business, puts to rest any short-term worries on whether Tesla [TSLA] can sustain its aggressive growth.

While the Chinese Gigafactory is not online yet and the Model Y has not been realized, Tesla used its time wisely to work on cost control and improve margins. Even though the average selling price of the Model 3 dropped as the Standard Range Plus became available in more places and the Model 3 continues to cannibalize some Model S sales, Tesla used its relentless drive to innovate, not just on its product, but also in its manufacturing process, to cut costs and increase margins.

• Tesla’s ability to build marginal Model 3 capacity at a third of the price (Capital Expenditures) of its plant in the US (Fremont) shows both the dramatic cost reductions possible in China and how much Tesla has learned in only a year. It’s not clear how much is from each factor. Will Tesla be able to match these costs in Germany?
• Even in the US, Tesla projects that it has cut the cost (in Capital Expenditures) per unit of capacity by 50% for the Model Y. Part of that is in design for manufacturability and part of that is in manufacturing innovation.
• Solar’s 48% QoQ growth shows that 2nd quarter 2019 was probably the low point in its solar business.
• Regulatory credits of $134 million definitely helped, but since even its GAAP and non-GAAP profits were greater than this amount, Tesla would have been profitable even without the credits. Still, there’s no sign of the huge credits from Fiat that were announced about 6 months ago.
• Tripling of leased vehicles from a year ago shows that offering leasing on the Model 3 has captured some sales, but Tesla has not resorted to aggressive lease deals that assume unrealistic deprecation factors to artificially boost demand.
• Tesla is in the final stages of selecting a European site to make Model 3 and Model Y vehicles.
• Model Y and Shanghai Gigafactory production are ahead of schedule.

My biggest takeaway is that Tesla has learned to continue to implement massive development of new vehicles and massive expansion of production capacity without spending massive amounts of cash.

This does not constitute investment advice. Please talk to an investment adviser that evaluates your individual situation before making any investment decisions.

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