Tesla Inc (NASDAQ:TSLA) shares slipped nearly 2% this morning on raising concerns that the company’s financial cash flow metrics will likely deteriorate. To the company’s credit, it hit a historically high roughly $3.3 billion in revenue for its fourth quarter earnings of 2017.
Guggenheim analyst Rob Cihra cheers that it is no longer a matter of “if,” but “when” regarding “meaningful Model 3 leverage as it ultimately ramps.” The analyst reiterates a Buy rating on TSLA stock with a $430 price target, which implies a close to 25% upside from current levels. (To watch Cihra’s track record, click here)
For the fourth quarter, Tesla’s revenue rocketed 44% year-over-year with non-GAAP EPS hitting ($3.62), mostly aligning with the analyst’s expectations. Where revenue met Cihra’s forecast, EPS performed slightly better than expectations for ($3.65). Consensus likewise called for $3.3 billion and EPS of ($3.04) considering SolarCity non-controlling interests- and ($3.11) without.
Meanwhile, keep in mind that California along with nine other states in the U.S. have adopted a system of Zero Emission Vehicle credits (ZEVs), where car makers selling internal combustion engine-based vehicles are mandated to hit a specific number of ZEV credits annually by putting zero-emission vehicles up for sale. For other car makers that do not meet the electric car production requirements, there is an option to buy credits from those manufacturers who have fulfilled the quota- or otherwise, they must shell out a $5,000 fine for every credit shortchanged. Tesla has taken this as a key advantage, considering the company’s sole production revolves around battery-powered cars. This means the electric car giant’s ZEV credits can be sold to other car makers- and with no direct costs involved. Tesla’s ZEV credit sales for the quarter offered a $179 million assist against the under $1 million help seen in the third quarter.
Fourth quarter deliveries hit a “healthy” 15% quarter-over-quarter rise and 35% year-over-year growth to 30,000 units, scoring upside in premium Models S and X at 28,400- a 10% quarter-over-quarter and 28% year-over-year jump. However, “Tesla only was able to get 1,542 of its new Model 3 into customers’ hands, which remains key to the story and financial leverage,” adds Cihra.
Moreover, the analyst comments, “Tesla continues to grind through the ramp of its new Model 3 but stuck to targets for 5K/week exiting Q2E and we continue to consider it a when, not if, ultimately driving big leverage off the big fixed-cost structure Tesla is building. We still estimate $2B cash burn in 2018E but >80% of that in 1H18E, then flipping to Op CF positive for the year and FCF positive 2019E+. TSLA expects to turn op income positive sometime in 2018, and we continue to estimate that starting Q3E with positive EPS Q4E.”
“Q4 production of Model 3’s increased to >2K from just >200 in Q3 but remains nowhere near ‘enough,’ yet with production rates at least increasing into quarter-end. And we see Tesla’s problem still being a good one to have at least in as much as Model 3 demand looks set to run ahead of supply for roughly the next 2 years,” Cihra underscores, still betting that the company’s 5,000 per week target will hit by the end of the second quarter of 2018- and not just be an ‘aspiration’ for CEO Elon Musk.
The TSLA team maintains its Model 3 production ramp target at 2,500 per week by the end of the first quarter of 2018. By 2019, the analyst wagers Tesla’s goal to achieve 10,000 in Model 3 vehicle units produced per week looks “realistic.” By 2020, the analyst wagers Energy will comprise of 7% of the company’s total revenues.
Though the company’s Model 3 delay reduces Cihra’s 2018 EPS expectations, he still predicts significant EPS leverage ramping come next year to 2020. With this in mind, the analyst scales back his 2018 revenue forecast from $3.8 billion to $3.5 million, a 30% year-over-year climb, and EPS from ($3.25) to ($3.63). Additionally, the analyst shifts his 2018 EPS estimate from ($2.83) to ($4.77), pointing to underabsorption of fixed overhead. Looking ahead, Cihra bets on a compelling ramp to drive EPS up to $11 in 2018 and under $17 by 2020. The analyst concludes pointing to total vehicle volumes reaching 300,000 this year, over 500,000 by next year, and above 750,000 by 2020.
TipRanks highlights a less bullish analyst consensus than Cihra’s sentiment, with Wall Street largely hedging bets on the electric car empire. Out of 18 analysts polled in the last 3 months, 4 are bullish on Tesla stock, but 7 remain on the sidelines, leaving 7 running for the hills. With a loss potential of 12%, the stock’s consensus target price stands at $302.00, indicating cautious sentiment is tilted more towards the bearish camp.