By Alex Kimani
At a time when oil prices remain stuck in limbo, Tesla Inc. (NASDAQ:TSLA) has continued to defy bearish expectations that low oil prices would put a damper on its core business of selling electric vehicles. For the fourth consecutive quarter, the EV maker posted yet another blowout that beat top-and bottom-line expectations. More importantly, it has exceeded Wall Street delivery estimates and reported record profits to boot. Tesla reported Q3 revenue of $8.77B, good for +39.2% Y/Y growth, and $460M above Wall Street consensus. Meanwhile, non-GAAP EPS of $0.76 beat by $0.16, while GAAP EPS of $0.27 missed by a similar margin.
However, it was Tesla’s third-quarter delivery numbers that had the bulls licking their chops in anticipation of another bumper year.
Tesla reported that it produced 145,036 vehicles in Q3 (+51% Y/Y) and delivered 139,593 vehicles (+44%), beating Wall Street’s consensus delivery estimate of 137,000.
Tesla also maintained its 500K delivery target for the full year, well above the Wall Street consensus of 476K.
Tesla’s profitability metrics were equally impressive. Operating income improved to a record level of $809M, good for a 9.2% operating margin–quite remarkable for an automaker. Automotive gross margin clocked in at 27.7% compared to 25.4% in Q2 and 22.8% a year ago. Those profits were achieved despite the company taking quite a big hit in the form of stock-based compensation for Elon Musk after he met several key milestones, including a significant increase in share price/market capitalization. Back in July, Elon Musk qualified for an unprecedented payout of $2.1 billion, his second jackpot since May following TSLA’s surge.
That marked the fifth quarter in a row that Tesla has reported a GAAP net income. TSLA stock is up 390% in the year-to-date despite slipping 11% over the past two weeks after the company unveiled its ambitious capital expenditure plans.
Road to 1M Deliveries
The company guided for CAPEX for the current fiscal year to come in at the high end of its previous guidance of $2.5B to $3.5B. Meanwhile, the company also said it expects CAPEX spending to clock in at $4.5B-6.0B in each of the next two financial years, marking record spending by the company.
The reason why the market has reacted negatively to Tesla’s spending plans is that it could mean even more trips to the secondary markets and more dilution for existing shareholders. In September, Tesla revealed a $5B equity offering in an SEC filing and said it intends to sell additional shares “from time to time” and “at-the-market” prices. That’s despite the company reporting a record free cash flow of $1.4 billion.
A $5B offering at Tesla’s current market cap of $402B would imply a ~1% dilution, significantly less than TSLA stock’s typical intraday moves. However, nobody knows how big or how frequent future offerings are going to be. Further, there’s the risk that TSLA could crash should it start missing future delivery expectations.
For TSLA bulls, though, none of that matters as Tesla enters a new phase: Hyperbolic growth.
One such bull is Bank of America, which says Tesla’s hyperbolic stock run needs hyperbolic growth to justify it, which in turn means Tesla needs enough capital to pull all the right growth levers.
“We expect TSLA will look to raise low cost and widely available capital, even beyond the opportunistic $5bn equity offering executed in the quarter (announced in September). Simply put, in our view, TSLA is a new disruptive (auto) company that may or may not be dominant in the long-term, but that does not matter as long as it can keep funding outsized growth with almost no-cost capital driving capacity expansion, which justifies a high stock price,” writes BAC analyst John Murphy.
In Tesla’s Q3 earnings call, New Street Research analyst Pierre Ferragu posed to Elon Musk:
“...now I’m trying to get a sense of how next year is going to look like. So if I look at your production capacity at the end of this year, it’s going to be almost 850,000 units on an annualized basis. And you’re going to increase capacity in Shanghai, open Berlin. You say today you would open Austin as well. So you’re probably going to end the year above 1 million units. And so am I right thinking next year we should expect to deliver like somewhere like between 840,000 and 1 million cars during the year?”
To which Musk responded in the affirmative saying:
“I mean, it’s in that vicinity. Yes. We’re not far off.”
The math seems to agree with Musk’s and Ferragu’s optimism.
In its latest shareholder letter, Tesla revealed that its Fremont, California factory can churn out 500,000 Model 3 + Y units and another 90,0000 Model S + X units per year. Meanwhile, Tesla’s new Shanghai factory has ramped up capacity at an incredible clip and now has the capacity for 250,000 Model 3 vehicles annually. Adding that up brings us to Ferragu’s lowball estimate of 840,000 deliveries in 2021.
But Tesla has a number of other gigafactories in the pipeline, which could significantly increase its production capacity as the quarters roll on: A Model Y factory in Austin, Texas, and a similar one in Berlin, Germany, with both under construction. Meanwhile, the company is adding a Model Y production line at its Shanghai factory.
Although Tesla has repeatedly missed deadlines in the past, the Shanghai plant was built and began vehicle assembly in just under a year. The bulls are, therefore, betting that two upcoming factories and the new Model Y plant in Shanghai will be completed before the end of the year and possibly ramp up capacity rapidly enough for Tesla to hit the magical 1M deliveries as early as 2021.
Tesla will, of course, first have to meet its FY 2020 delivery target of 500K units to win the bears over.