Company Overview: Tesla, Inc., formerly Tesla Motors, Inc., designs, develops, manufactures and sells fully electric vehicles, and energy storage systems, as well as installs, operates and maintains solar and energy storage products. The Company operates through two segments: Automotive, and Energy generation and storage. The Automotive segment includes the design, development, manufacturing, and sales of electric vehicles. The Energy generation and storage segment includes the design, manufacture, installation, and sale or lease of stationary energy storage products and solar energy systems to residential and commercial customers, or sale of electricity generated by its solar energy systems to customers. The Company produces and distributes two fully electric vehicles, the Model S sedan and the Model X sport utility vehicle (SUV). It also offers Model 3, a sedan designed for the mass market. It develops energy storage products for use in homes, commercial facilities and utility sites.


TSLA Details

Tesla Inc (NASDAQ: TSLA) stays upbeat on its weekly production guidance by the end of June; and with the management reiterating earlier guidance that GAAP net income will be positive in Q3 2018, with positive cash flow in Q3 and Q4, the stars might witness a change for the group, as lately seen in the month of June. The group does not expect any incremental debt or equity at this stage. While the group is yet to be in its perfect shape, the production is improving and TSLA aims to reveal the Model Y crossover in March 2019. Challenges with its Auto-pilot Functionality are also being dealt with to improve customer experience. Then, energy storage segment is expected to achieve over 20% gross margin by late this year or early 2019.

Major job cuts at Tesla to boost profitability: Tesla’s stock continued to rise by 0.6% on June 13, 2018 post a 3% rise seen on June 12, 2018. The company has planned to cut approximately 9 percent of the workforce, which means cutting several thousand jobs across the company. Through this, TSLA is making an attempt to slash its costs and become profitable without having an impact on production ramp-up of Model 3 sedan. However, this excludes production associates so that TSLA’s ability to reach its Model 3 targets in the coming months is not affected. This is the biggest cut in TSLA’s history and reflects the pressure CEO, Elon Musk is undergoing to reduce the cash usage. Further, the group is averting any need of capital raising this year, as the company has about $1.2 billion in convertible bonds maturing through in 2019. Therefore, to meet the production challenges, and managing intensifying competitive threats along with balance sheet obligations with debt quickly coming due, the company requires approximately more than $2 billion funds. Moreover, TSLA is aiming to invest in building new car and battery factories in China and Europe, to deliver a new crossover, sports car and semi-truck in the coming years. This may thus require funding by 2020. Apart of workforce reorganization, TSLA will also focus on selling solar power in its own stores and online. Meanwhile, TSLA will provide benefits in terms of salary, health and vesting of stocks to employees who have been asked to leave. Overall, the layoffs may help them to achieve profitability in the near-term while the group would need to manage the production going forward.

Model 3 deliveries seem to be tracking well: Despite Tesla repeatedly failed to achieve the previous Model 3 production targets, the stock was up approximately 13.7 percent in the last month after Musk projected that TSLA would finally achieve its goal of 5,000 vehicles per week by the end of June. Moreover, as per the latest round of sales center checks, Model 3 deliveries are tracking well above the previous estimates. Based on conversations with 20 sales centers across the U.S., there has been a change in the weekly run-rate volumes (from high teens to the low 30s) post the last checks in mid-April. TSLA seems to be on track to deliver between 30,000 and 35,000 Model 3s in the second quarter of 2018, which is about 50 percent more than the  previous estimate of between 20,000 and 25,000 vehicles by the market. 
              
Strong First Quarter 2018 Vehicle Production and Deliveries: In the first quarter of 2018, the production rose by 40% to 34,494 vehicles from the fourth quarter and this has been the most productive quarter in Tesla’s history. Primarily, 24,728 of Model S and Model X, and 9,766 of Model 3 were reported under production update. The Model 3 output has risen exponentially, which represents a fourfold rise over last quarter. Thus, the growth has been overwhelming in the current landscape of automotive industry and if this rate of growth continues, TSLA will exceed competitors such as Ford. The company enhanced the weekly Model 3 production rate by twofold during the first quarter 2018 through a proper management of production and supply chain bottlenecks including short factory shutdowns etc. Moreover, in the first quarter of 2018, TSLA’s deliveries totaled 29,980 vehicles, out of which 11,730 were Model S, 10,070 were Model X, and 8,180 were Model 3. The net orders for Model S and X were high in the first quarter 2018 and the demand remains decent. Further, Model S and X customer vehicles in transit are also high and 4,060 Model S and X vehicles were in transit to customers at the end of the first quarter, which was 68% higher than at the end of the fourth quarter 2017. Additional 2,040 Model 3 vehicles were also in transit to customers and these vehicles are expected to be delivered in early second quarter 2018. This means TSLA looks to be on track for the full-year 2018 Model S and X delivery guidance. Additionally, the quality of Model 3 coming out of production is at the highest level across all the company’s products. The initial customer satisfaction score for Model 3 quality was above 93%, noted to be the best in group’s history. In addition, the net Model 3 reservations remained stable during the first quarter 2018.


Energy Generation and Storage Result (Source: Company Reports)

Beaten the market expectation for both the topline and bottom line in the first quarter of FY 18: TSLA in the first quarter of FY 18 has reported a loss of US$3.35 for the first quarter of 2018, less than the US$3.58 loss analysts initially were expecting. The company had reported the adjusted revenue growth of 35.9 percent to $3.4 billion in the first quarter of FY 18, beating the analysts’ estimates for revenue of $3.22 billion. Therefore, TSLA had beaten the expectations of the analysts with its first-quarter results, although concerns over its cash burn, huge debt pile and production issues are still remaining. Meanwhile, Tesla had expected to produce 2,500 Model 3s by the end of the quarter but was forced to backtrack on that as it grappled with production issues in its factory. The company was actually managed to produce 2,020 in the final week of the first quarter, although that was still below market Model 3 tracker which had expected the company to be making 2,323. Moreover, by achieving 5,000 mark, it will help the company deliver on one of Musk’s big claims, about TSLA achieving the full GAAP profitability in the third and fourth quarters. Therefore, Musk claims are based on the company’s ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin to witness breakeven in Q2 from the negative figure in Q1 2018 and then move to positive zone in Q3 and Q4. The Model 3 gross margin has been otherwise impacted by temporary underutilization of the manufacturing capacity, as indicated earlier. Furthermore, in the first quarter of 2018, Automotive revenue rose by 19% over Q1 2017, mainly due to Model 3 deliveries and adoption of the new accounting standard. The gross margins of Model S and Model X have been improving due to better cost reductions, mix management, FX gains and pricing actions. The company’s energy generation and storage revenue in Q1 2018 grew by 92% over Q1 2017 and by 38% compared to Q4 2017. This is mainly due to substantial growth of the energy storage deployments and recognition of the large project in South Australia. Service and Other revenue in the first quarter rose by 37% compared to the first quarter 2017 primarily due to higher used car sales, but fell by 9% sequentially as used car sales were lower in Q1 2018 compared to Q4 2017 due to a lower inventory of used cars available for sale during the quarter.  In addition, at the end of the first quarter 2018, TSLA had US$2.7bn of cash in the bank.


First Quarter Performance (source: Company Reports)

Case against TSLA: TSLA has been under legal threat as claims of over $2 billion have been indicated by electric-hydrogen truck startup Nikola Motor Co., in view of patent infringement cases. Nikola has filed a lawsuit in Arizona, claiming Tesla of copying the design of its big rigs, which were disclosed in May 2016. More is to be heard on the case.

Outlook: TSLA has reconfirmed the production guidance of 5,000 Model 3s per week by the end of the second quarter, but warned that it has previously 'demonstrated the difficulty of accurately forecasting production rates'. However, the company has lowered its full-year capex projection to less than US$3bn from over US$3.4bn.


Ownership of Securities by Elon Musk (Source: Company Reports)

Stock Recommendation: In the first quarter 2018, TSLA has posted strong vehicle production and deliveries. The company has also beaten the analysts’ expectation for both the topline and bottom line in the first quarter of FY 18. Recently, Musk has added to his position in the company by buying 72,500 shares worth about $25 million, in efforts towards making TSLA profitable. This comes after the $10 million of investment injected in the month of May. In view of the risks that prevail while the group is working on its dynamic landscape and improved production, we give a “Buy” on the stock at the current price of $ 344.78.
 

TSLA Daily Chart (Source: Thomson Reuters)
 
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