Issue 128  February 24th 2017

Thoughts on Q4 Earnings

On Wednesday Tesla reported quarterly earnings for Q4 2016. I thought it was a great earnings report (read the shareholder letter here. Tesla has never been in a better place as a company.

1. Model 3 on track Tesla affirmed Model 3 production is on track for initial production in July and volume production in September. They are already making beta prototypes as of early February and conducting crash testing. And their goal is to exit 2017 at a 5000/week (250k/yr) production run rate for the Model 3. In 2018, they hope to hit 10,000/wk (500k/annual) production run rate. Overall, the Model 3 is what Tesla investors have been waiting for all these years. It’s the realization of Tesla’s dream to go mainstream - something most people thought was improbable. But it’s finally happening, and (although first vehicles will go to employees) we’re going to see the first Model 3 vehicles in roughly 5 months time. Once Model 3 reaches full volume production (10k cars/week), Tesla is looking at a combined revenue of roughly $27B and assuming a gross margin of 20%, we’re looking at $5.4B in gross profit. Most of that will be used to cover operating expenses but there will be plenty left over to invest into future growth. In other words, with Model 3 full production Tesla becomes a cash cow of sorts (even though their income statement might not show it because they’ll still be investing heavily into future growth) and will be a in great position to expand their vision across autos, energy, trucking, and more.

2. Solarcity’s financials nicely integrated Solarcity as a standalone company had quite complicated financials presented in their earnings reports. However, in this first quarterly report after the acquisition, Tesla has chosen to succinctly integrate Solarcity’s financials and remove most the previously presented complexities. I think this is a smart move from Tesla, as it redirects investors’ attention to the Model 3 and tries to remove attention from Solarcity and the challenges of integration and reworking Solarcity’s business model to go toward more cash purchase solar systems and solar roofs.

3. Tesla laying groundwork for 2020-2025 Tesla has chosen to call Solarcity’s Buffalo factory, Gigafactory 2. And they’ve announced that they’re looking to announce locations for Gigafactories 3, 4 and maybe 5 later this year. My guess is we’ll see a Gigafactory in China and in Europe, for sure. While this isn’t required for Tesla to hit 1 million cars/year by 2020, the additional Gigafactories will allow Tesla to localize production and make cars sold in Europe and China much cheaper than if they were subject to import taxes. The result will be higher demand and lower costs for Tesla. While Tesla publicly talks about 1M cars in 2020, they are actively preparing for much larger numbers beyond 2020 and are putting into place the piece required to reach those goals.

4. Capital raise I think it’s inevitable that Tesla raises capital soon and the main reason is because they’re goals and timeline for the Model 3 are very aggressive and need aggressive funding that isn’t present from their current Model S/X business. While the Model S/X business would fund a modest Model 3 rollout, Tesla wants to do the most they can and meet as much demand as possible. I expect Tesla to soon raise an extra $2 to $3 billion to provide extra cash cushion during their Model 3 expansion and rollout.

Overall, Tesla is in great shape and the Model 3 is imminent - this is what matters to the long-term TSLA investor.