Tesla [TSLA] Q1 2020 Earnings Thoughts

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Tesla’s Q1 earnings call was one week ago today, and in that week it seems that a million things happened in the world of Tesla. A pandemic apparently can not slow down the incredible amount of news that comes out about this company, perhaps in part because so much of the news generation is based on Elon Musk’s Twitter account, and that’s been nothing short of a ride lately.

But, I’m going to dive further into what I think of the earnings report now, as well as some other things that I feel may not have been pointed out by mainstream analysis. This is going to be a bit different from my usual analysis. The COVID-19 situation has changed so much that I find it difficult to look into particular numbers and instead find myself taking more of a “big picture” approach with a lot of this stuff.

No Surprises

It seemed a lot of analysts were really surprised by these earnings, but none of it really surprised me (other than Elon’s rant). Quarters are three months in length. While COVID-19 significantly impacted Chinese manufacturing, since manufacturing had just begun there, I wasn’t expecting this to materially impact things. Conversely, the Fremont factory closed down less than two weeks from the end of the quarter, greatly mitigating its Q1 impact.

US deliveries would have been impacted during those final two weeks, but the Tesla sales model is so different from that of other automakers — you don’t really have to do anything in person at a Tesla store, unlike with the traditional dealership model — so I would have been surprised if there was a huge impact on sales this quarter.

This allowed Tesla to eke out a small profit for the quarter.

I think many analysts drastically lowered their expectations due to the traditional seasonality of the business, the first quarter being when production halted, and just that the call happened when the world was seemingly shut down. I wasn’t one of them, and I expected a pretty solid quarter, which is exactly what was delivered.

Things Working For Tesla Right Now

While it’s pretty clear that Tesla didn’t expect this shutdown and doesn’t welcome it, the company is set up to weather the storm far better than other automakers thanks to factors that include:

• Tesla’s recent capital raise.
• Much lower rates of leasing than other automakers, meaning they don’t have anything to buy back right now. (Tesla’s lease rate was the highest it’s ever been in Q1 2020, at just 4.9%. The industry averages over 30%.)
• Almost no dependence on rental fleet sales.
• Little excess inventory due to how production is managed — although, this did cause free cash flow to be negative in quarter 1.
• Keeping so much of production in house — supply chain interruptions will be far less than at other manufacturers.

And this is just the automotive side of the business. Tesla’s energy side gives it the ability to diversify products and customers moving forward.

2nd Quarter Will Be Interesting

The timing of the COVID-19 crisis meant that most primarily US-based businesses will not start to see the impact of the virus in their earnings until the second quarter. Most companies were able to have 10 weeks of normal sales. For instance, theme park operator Cedar Fair recently reported a 30% increase in season pass sales year on year for Q1 2020.

That’s … not happening this quarter. Even when things start to reopen, there is no guarantee that people will head out — and a lot of evidence that they won’t. This is what I was talking about in my previous article, that reopening things without solving the underlying issue will not give us the V-shaped recovery some expect.

Because of that, I hesitate to dig into any particular numbers from the earnings report to draw conclusions about the future. I believe demand will rebound — led by China and Europe — but I’ll admit that’s a gut feeling until we see further evidence. But that’s the thing. The entire business world should pretty much have a mulligan for Q2 2020 — at least in the US — so it’s extremely hard to pick out what matters at this exact moment.

(As an aside, I don’t believe that historically low oil prices will impact Tesla’s sales much if at all. This deserves its own article sometime soon.)

I was encouraged to see that Tesla is still planning on expanding at rapid rates, as I think there is a lot of opportunity there. It’s just impossible at this point to predict what the opportunity is when the world is shifting so quickly.

Conclusion

And I guess that’s my point with the Q1 numbers. I came away neither impressed nor unimpressed. I considered selling some of my shares the day after the earnings call when it was briefly over $850, anticipating a dip in stock price that would allow me to repurchase the shares cheaper. I did not anticipate that dip would have occurred the next day, but c’est la vie. I anticipate further swings ahead, but I also rarely try to time the market, so it’s likely I’ll just keep holding my position for now.

There are a lot of positives that Tesla has right now, and this tiny company that less than 8 years ago Mitt Romney declared in a presidential debate as a “loser” is, as I write this, worth more than Volkswagen ($66.1B), GM ($32.7B), Ford ($19.6B), and Fiat Chrysler ($16.6B) combined (Tesla is currently worth $145.8B). Production will begin again, and it’s pretty clear the market is in agreement that Tesla will lead the way into the future.

Disclaimer

I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.