Here's What Wall Street Thinks Of Tesla's Q1 Earnings

Tesla Inc TSLA shares fell as much as 7.3 percent on the company’s mixed first-quarter earnings report, but whatever shook investors didn’t faze the analysts.

What Went Well

Morgan Stanley analysts Adam Jonas and Armintas Sinkevicius confirmed the first quarter was “no worse than expected.” Tesla exceeded forecasts on gross auto margins while meeting already low bars for cash burn.

Bank of America Merrill Lynch also emphasized better-than-expected operating expenses coupled with a sales beat driven by immediate revenue recognition on more vehicles.

The quarter fell in line with Bernstein’s estimates for revenues, gross margins and free cash flow.

Gross Margin Concerns

At the same time, Tesla missed BofA’s total gross margin estimate by 4 percentage points — a metric Bernstein said could suffer near-term as the firm increases labor and rolls back automation.

“Soberingly, and most importantly to the investment thesis, Tesla appeared to push out its Model 3 gross margin target of 25 percent by six to nine months,” Bernstein analyst Toni Sacconaghi Jr. wrote in a note.

Loup Ventures managing partner Gene Munster attributed the stock’s sell-off to the intimated lag, which reads poorly for cash burn.

Profitability Prospects

However, Munster said the concern may be myopic.

“Focusing on Model 3 near-term gross margins misses the point,” he wrote in a note. “The company reiterated that it expects to be GAAP profitable and cash flow positive by year-end, and will not to tap the capital markets for cash.”

But Bernstein questioned the ability to achieve positive cash flow without “significant” working capital improvement. Near-term positive net income, he said, is “a somewhat unlikely scenario that appears predicated on TSLA achieving exceptional operating leverage.”

BofA agreed.

“We have less confidence in the company’s ability to overcome current production challenges and generate positive earnings/cash at any point this year,” analysts John Murphy, Aileen Smith and Yarden Amsalem wrote in a note.

Cash Burn And Capital Raises

The BofA analysts noted that, with just $2.7 billion in cash, continued quarterly burn around $1 billion may necessitate a capital raise. They anticipate a $1 billion equity raise later this year.

Both Morgan Stanley and Bernstein echoed the expectation.

“We see cash flow usage of about $1.5 to $2 billion over the next two quarters, which may necessitate a capital raise,” Sacconaghi Jr. wrote.

However, such a strategy may prove challenging. BofA said “increasingly concerning” lack of visibility could strain investor patience and limit Tesla’s ability to raise capital.

Car Commentary

Tesla maintained targets to produce 5,000 Model 3s per week by the end of June, but Morgan Stanley predicted the rate won’t be achieved until the end of the year. Bernstein similarly labeled the ramp a work in progress and accordingly cut Model 3 delivery estimates.

Management also said it wouldn't begin Model Y production until early 2020 and would construct a new factory for the vehicle. By Munster's calculations, the promised year-end cash flow will improve fundraising for the new facility, which could also be self-funded if the Model 3 reaches 20- to 25-percent gross margins.

Separately, Bernstein questioned Tesla’s claims that the Model Y would be a “manufacturing revolution.”

“But we can't help wondering whether we've already seen this movie before with the Model 3,” Sacconaghi Jr. wrote.

The Ratings

Acknowledging high volatility, Munster remains bullish on Tesla for its opportunity in electric vehicles, autonomy and renewable energy.

“It’s clear that investors are having trouble seeing the forest through the trees,” Munster wrote.

KeyBanc analysts Brad Erickson and Elliot Arnson said the stock — while reflective of “significant premium” — looks slightly oversold considering the Street’s low bar for Model 3 profitability, “a solid and likely improving demand narrative,” headline upside risks as production improves and upcoming incremental production announcements.

Accordingly, they maintained a Sector Weight rating on the stock.

• Bank of America Merrill Lynch maintained an Underperform rating with a $180 price target.
• Bernstein maintained a Market-Perform rating with a $265 price target.
• Morgan Stanley maintained an Equal Weight rating with a $376 price target.

Although maintaining unit forecasts, KeyBanc raised top- and bottom-line estimates for the next three years to account for lease accounting, higher Model 3 average transaction prices, and improved gross margins on Models S and X.

At time of publication, Tesla's stock traded down 6.3 percent at $282.

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