Tesla Analysts Break Down Free Cash Flow, Fremont Shutdown, 2020 Expectations After Q1 Print

Despite the chaos in the world around Tesla Inc (NASDAQ: TSLA), the automaker reported a strong first quarter Wednesday, with sales of $5.985 billion exceeding a $5.9-billion Street forecast and a bottom line of $1.24 far surpassing expectations of a 36-cent loss.

The performance was driven in part by early Model Y deliveries and a 40% year-over-year increase in total deliveries. Additionally, Tesla notched a 9% increase in Model S and X production, a 39% increase in Model 3 and Y output and its first weekly production of 1,000 solar roofs.

While Tesla said that global Model Y production will stay on schedule, it postponed Semi deliveries to 2021 and put a hold on near-term profitability.

Tesla’s Financials

Bank of America applauded the company’s outperformance in revenue per unit and gross margins, while Wedbush highlighted 20.6% GAAP gross margins “that [speak] to a business model which has significantly lower costs and more production efficiency.”

“This level of profitability is key for the bulls and it speaks to a business model which is staying out of the red ink despite this unprecedented COVID-19 dark storm,” Wedbush analyst Daniel Ives said in a note. 

GLJ Research focused on Tesla’s free-cash-flow generation, noting the company “returned to form” with its burning of $895 million. Loup Ventures reflected more positively on the metric.

“Free cash flow would have been positive if not for the inventory rebuild,” Gene Munster wrote. “Tesla had negative free cash flow of $895 million, but inventory growth accounted for $981 million. The biggest reason for the increase in inventory is that the pandemic-induced shutdown resulted in postponing the end-of-quarter delivery surge.”

Tesla’s regulatory credit revenue also caught analysts’ attention. BofA Securities estimated that the source contributed about $1.11 per share — the majority of the bottom line — while GLJ Research found that, by excluding the revenue, Tesla’s auto gross margins fell sequentially from 20.2% to 18.4%, with a GAAP loss of $338 million.

Overall, GLJ remains skeptical not only of Tesla’s financial stability but of its accounting quality. 

“How is it possible for TSLA to report lower OPEX in 1Q20 vs. 4Q19 when it was operating 2 multi-billion dollar auto plants in 1Q20 vs. just one in 4Q19, and why does Tesla, as its CFO admitted yesterday, pay current quarter payables in the forward quarter (thus, seemingly artificially boosting its current quarter cash balance),” analyst Gordon Johnson wrote.

Tesla’s Operations

CFRA and Needham took note of Tesla’s silence around the restart of the Fremont factory. Management stalled the plant on March 23 and intended to reopen on May 4, but the Bay Area extended a shelter-in-place order to the end of May.

“We expect the extended shutdown of the Fremont plant, which produces the majority of their vehicles, to have a significant impact on TSLA's 2Q results,” Needham analyst Rajvindra Gill wrote.

GLJ Research emphasized Tesla’s European market share decline from 37.2% to 25.3%.

Forecasts For Tesla 

BofA said there’s little visibility into the second quarter, but expects the period to be the hardest of the year.

“[COVID-19] may disproportionately hit TSLA by derailing its ongoing capacity/production expansion across its plants,” analyst John Murphy wrote. 

“Beyond disruption from the COVID-19 pandemic, we remain skeptical that TSLA has sustainably turned the corner on profits and cash flow, and rather believe that further growth will be accompanied by additional income and cash flow volatility.”

While it sees no potential for Tesla to hit its goal of 500,000 deliveries this year, Wedbush is more optimistic about the coming quarters than BofA.

 “Although the rest of the world is essentially shutdown and in lockdown mode, strong Model 3 demand out of China remains a ray of light for Tesla in a dark global macro,” Ives said. 

Johnson said he expects Tesla to burn $2.4 billion in free cash flow this quarter given the burn rate in the prior quarter. 

“With Tesla back to its old ways of incinerating cash, despite the most competitive backdrop the company has ever experienced looking into 2H20, following what we believe will be a $3 billion to $4 billion capital raise over the coming weeks, following by multiple capital raise attempts through 2020, we maintain a (very) negative bias,” he wrote.

By contrast, Loup views the next 18 monthly positively and expects Tesla to capitalize on a variable cost dynamic.

While positive on Tesla’s China opportunity, Needham expects long-term margin pressure from competition and declining sales of high-margin vehicles.

“We remain cautious on TSLA's performance for the remainder of 2020, as automotive demand has largely collapsed in the US and Europe due to the impact of COVID-19,” Gill wrote. 

CFRA is staying on the sidelines and attributed its stance to a lack of visibility on the Fremont restart and a doubling in Tesla’s share price. 

“Perhaps the most prudent move TSLA could make is to complete another equity issuance to further bolster liquidity and fund future plant construction, although this seems unlikely after it completed a $2.3B stock offering in February,” analyst Garrett Nelson wrote. 

Tesla Ratings

• Bank of America maintained an Underperform on Tesla and raised its price target from $485 to $500. 
• CFRA maintained a Hold rating and raised its target from $480 to $775. 
• Credit Suisse maintained a Neutral rating and raised its target from $580 to $700. 
• GLJ Research maintained a Sell rating. 
• JMP Securities maintained a Market Perform rating and raised its target from $840 to $1,020. 
• Needham maintained an Underperform rating. 
• Oppenheimer maintained an Outperform rating and raised its target from $684 to $968. 
• Piper Sandler maintained an Overweight rating and raised its target from $819 to $939.
• Wedbush maintained a Neutral rating and $425 target.

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Photo courtesy of Tesla.