Wall Street Analysts Reflect On Tesla's Q4 Earnings

Tesla Inc TSLA posted marginal top- and bottom-line beats in its Wednesday earnings report, and traders retreated Thursday with a 5-percent pullback.

Analysts reflected on the quarter with similar ambivalence.

The Cash Situation

Nomura analyst Romit Shah considered the report decidedly “encouraging” considering cash burn of just $166 million against a $966 million estimate.

Morgan Stanley was similarly enthralled by Tesla’s free cash flow, capital expenditures and working capital, which positively eclipsed expectations by respective $500 million, $250 million and $500 million.

“We think working capital may remain a factor underestimated by the market that will help cash consumption materially through 1H18,” Morgan Stanley's Adam Jonas wrote in a note.

Nonetheless, he and Bernstein Research forecasted 2018 free cash flow of negative $2.7 billion, dragging gross cash down to $1.2 billion.

Tesla management outlined a path to positive operating income in 2018 despite guiding for increased capex to support capacity expansions.

“The company enters 2018 with ample liquidity and its negative trade cycle should see a boost when the M3 ramps,” Jonas wrote.

Bernstein and Baird Equity Research agreed that a capital raise may not be necessary, especially if Tesla continues to securitize receivables.

Related Link: A Mixed Street Reaction To Tesla's Q4 Deliveries

Vehicle Gross Margins To Pick Up

Having been stripped of $179 million in Zero Emission Vehicle credits, Tesla posted automotive gross margins of 13.2 percent against analyst forecasts around 14.5 percent.

But analysts anticipate improvement. Morgan Stanley increased its annual gross margin expectations from 22.6 percent to 24.3 percent, and Baird predicted expansion through 2018.

Bernstein, though, was alarmed by guidance for negative Model 3 gross margins in the first quarter, which compound concerns around the other vehicles’ poor metrics.

“GMs for Model S and X were weak in the quarter, and do not appear to reflect ongoing operating and manufacturing efficiencies that Tesla asserts it is capturing,” Bernstein's Toni Sacconaghi wrote in a note.

Model 3 To Lag Again

As Nomura expected, Tesla reiterated its Model 3 production forecast of 2,500 per week by the end of the first quarter and 5,000 per week by the end of the second. Morgan Stanley, however, has little confidence that the company will execute. Jonas assumes 667 and 2,500 Model 3s per week in the respective quarters, with the year never striking a 5,000-per-week rate.

Bernstein, meanwhile, nearly halved first-quarter delivery forecasts from 28,000 to 15,000, and Loup Ventures managing partner Gene Munster predicted enduring hitches in scaling efforts.

“We believe retooling could cause a temporary step down in production in the fall of 2018, and as a result, are lowering our [annual] Model 3 production target to 168,400 from 182,000,” Munster wrote in a Thursday note. Nonetheless, he maintained a weekly production forecast of 7,150 per week for the end of 2018.

Morgan Stanley increased its 2018 total target from 110,000 to 122,000, while a yet-bullish Bernstein lowered its to 190,000.

2018 Auto Prospects

Tesla guided well below Morgan Stanley’s estimates for 2018 Model S and X volume, with management expecting 100,000 units against the analyst’s 113,000. Jonas attributes the flat development to Model 3 cannibalization, growth in the used vehicle market and, as Tesla mentioned, constrained battery supply.

The firm inspired confidence in its technology opportunity, though. Baird maintained belief in Tesla’s leadership in electric vehicles, while Munster reiterated confidence in its potential to capitalize on autonomous vehicle trends.

Management justified a preference for cameras over LiDAR in the AV suite and asserted that its target system would outperform alternatives in more complex driving conditions.

“This is important given that if Tesla is successful in using its vision suite instead of LiDAR, every Tesla produced today will be upgradable to full autonomy with a software update, which would catapult the company into the lead position in the race to autonomy,” Munster wrote.

Related Link: Tesla's Q4 Model 3 Miss: Adam Jonas Says Buy The Dip

Solar, Battery Segments To Shine

Management suggested energy sales could triple in 2018 with accelerated production of storage products and execution on a backlog of high-margin projects.

“Tesla Energy should have significant sales growth and gross margin expansion in 2018, and we continue to believe the business is underappreciated,” Baird analyst Ben Kallo wrote.

Analyst Ratings

• Baird Equity maintained an Outperform rating and a $411 price target.
• Bernstein maintained a Market Perform rating and a $265 price target.
• Morgan Stanley maintained an Equal-Weight rating and a $379 price target.
• Nomura maintained a Buy rating and $500 price target.

Tesla’s report prompted two 2.7-percent spikes in after-hours trading followed by fades of equal magnitude. At time of publication, shares were down 5.6 percent off the open to trade around $325.60.