Musk Throws ‘Pie’ at Naysayers as Tesla Posts Rare Profit

  • Earnings surprise aided by cost-cutting, zero-emission credits
  • Reprieve on cash burn will be short as Model 3, SolarCity loom

Is Tesla's Profit a Pie in the Face of Wall Street?

Tesla Motors Inc. posted an unexpected profit and said it expects to get through the rest of the year without raising cash, easing one concern for investors as it expands production of electric cars and prepares to acquire money-losing SolarCity Corp.

The profit, Tesla’s first in eight quarters, boosted its shares as much as 5.7 percent Thursday after they had slumped 16 percent this year. It also provided welcome vindication to Chief Executive Officer Elon Musk, who in an August e-mail obtained by Bloomberg pushed workers to cut costs, deliver every car possible and drive the results into positive territory. “It would be awesome to throw a pie in the face of all the naysayers on Wall Street,” Musk wrote.

The pie Musk delivered Wednesday included some unconventional ingredients, chief among them $139 million in the sale of zero-emission-vehicle credits to other car-makers who need them to meet California’s clean air rules. In the previous quarter, Tesla said they “recognized an insignificant amount of ZEV credit revenue” and didn’t provide a number. On Thursday, analysts and investors scrutinized Tesla’s third-quarter performance, especially the ZEV credit revenue and unusually low capital spending, and questioned if it could be sustained this quarter. The stock pared its gains and was up 1.5 percent to $205.28 at 2:51 p.m. in New York.

While Musk demonstrated Tesla’s ability to temper its cash burn during the quarter, the spending will increase markedly in this year’s final three months under the demands of preparing the Fremont, California, factory for Model 3 production and building out the gigafactory for battery production east of Reno, Nevada. Tesla reaffirmed that battery cell production will begin later this year.

For a quick wrap of the analyst commentary today, click here.

The ZEV credits of $139 million were “well above” the $30 million estimated by UBS, wrote Colin Langan of the Swiss bank, one of the few analysts to predict a profit. Still, Tesla’s “cash burn likely returns” in the fourth quarter and beyond with an expected spike in capital expenditure, the UBS analyst wrote.

Cash Cushion

Analysts questioned Musk on a conference call about when the Palo Alto, California-based company would need to raise cash. Musk said the company doesn’t need more money to get the Model 3 to market. The company might raise cash to “de-risk” the business and keep a cash cushion to shield it in case of an unexpected negative event like a global macroeconomic slowdown, he said.

“A capital raise may be done opportunistically to create a financial buffer,” Ben Kallo, a Robert W. Baird & Co. analyst, said in a note to clients Thursday. He rates Tesla shares outperform.

Musk also said that Tesla may not have to raise more money even if the SolarCity deal is approved by shareholders Nov. 17. The installer of rooftop solar panels may even contribute cash to the business in the fourth quarter.

“Do not take this to the bank,” Musk said. “This is not a promise. This is like – this is what appears to be the case. So contingent upon shareholder approval, we expect SolarCity to be somewhere between neutral and a cash contributor in the fourth quarter.”

Tesla’s positive free cash flow of $176 million in the quarter is helped by the fact that the company’s capital expenditures budget is heavily loaded to the fourth quarter. Tesla spent $759 million in the first nine months of the year and plans to spend more than $1 billion in the fourth quarter.

Model 3

Tesla said it will deliver just over 25,000 cars in the fourth quarter, after a final third quarter delivery count of 24,821. That will bring Tesla to 79,033 vehicles for the year. Tesla says it will make 500,000 cars a year in 2018.

The Model 3, slated to begin at $35,000 before government incentives, is key to Tesla’s plan to expand to a wider market for its battery-powered autos. Enthusiasts stood in line at stores around the world to place $1,000 reservations for the Model 3 when it was revealed in late March. In May, Tesla said it had received roughly 373,000 pre-orders for the car, but has not updated that figure since.

The reservation number for the Model 3 has been of key interest to analysts, who tried once again to get Musk to update the figure. Musk declined, saying it is “not something that is a figure of merit in any way” and noting that the only promotion of the Model 3 to date were some tweets and a web cast.

The Model 3, scheduled for deliveries in the second half of 2017, has already sold out in advance for its first 12 months of production, and Musk said he doesn’t see the point of actively trying to sell the vehicle.

“When somebody comes into our store to buy a Model 3, we say, well, why don’t you buy Model X or an S instead?” said Musk. “So we anti-sell the 3. Still a lot of people order the 3, but whatever.”

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