Tesla Inc (NASDAQ:TSLA) announced financial results for its second quarter ended June 30, 2017.
Revenue & Gross Margin
- Automotive revenue grew 93% as compared to Q2 2016 largely due to 53% growth in total vehicle deliveries, and a smaller percentage of vehicles sold with residual value risk that were subject to lease accounting. Compared to the prior quarter, automotive revenue was flat despite a decline in vehicle deliveries due to lower mix of deliveries subject to lease accounting and the sale of $100 million of ZEV credits in Q2.
- About 19% of Q2 deliveries were subject to lease accounting, down from about 25% in Q1, as we retained residual risk on fewer vehicle deliveries. When we do retain residual risk through a Resale Value Guarantee, or direct or indirect leasing, our vehicles are holding value better than estimated. Thus, we expect to be break even when re-selling them.
- In line with our guidance, Q2 non-GAAP automotive gross margin was 25.0%, representing a sequential decline of about 285 basis points primarily due to the absence of the one-time benefit of Autopilot software recognized in Q1 and fluctuations in product mix.
- Q2 Energy generation and storage revenue increased 34% sequentially primarily because of a seasonal increase in solar lease revenue resulting from higher energy production versus the prior quarter, a greater percentage of cash sales and higher deployment of energy storage systems.
- Total Q2 operating expenses declined sequentially primarily due to the absence of $67 million of non-recurring charges related to acquisitions that were recognized in Q1.
- GAAP and non-GAAP loss from operations improved in Q2 as compared to Q1 due to lower operating expenses, despite increased costs related to the launch of Model 3.
- GAAP and non-GAAP net loss increased slightly in Q2 as compared to Q1 due largely to higher FX-related non-cash revaluations of the balance sheet, and mark-to-market of interest rate swaps.
- Basic shares outstanding at the end of Q2 were approximately 167 million.
Cash Flow and Liquidity
- Cash consumed in operating activities during Q2 was higher than Q1 primarily due to higher inventory and receivables. Including the cash received for vehicle sales to our leasing partners that is classified in the financing section of our statement of cash flows, we consumed $51 million of cash in Q2.
- Capital expenditures were $959 million in Q2, as we invested in Model 3 capacity in Fremont, in Gigafactory 1, and in the expansion of our customer support infrastructure. Total capital expenditures of $1.5 billion in the first half of 2017 were lower than expected primarily due to the timing of milestone-based cash payments.
- Cash balance of slightly over $3.0 billion at the end of Q2, plus expected cash generated from operations in the second half of 2017, provide sufficient liquidity to fund our capex projections, and provide flexibility through the Model 3 ramp.
- During Q2, we increased the capacity of our revolving asset-backed credit line by $625 million to $1.83 billion (with the ability to expand capacity by another $175 million to $2 billion).
In addition to the 2017 Model 3 production guidance provided above, we expect Model S and Model X deliveries to increase in the second half of 2017, as compared to the first half of the year.
Several factors will influence our non-GAAP automotive gross margin for the rest of this year. The combined non-GAAP gross margin for Model S and Model X in Q3 will decline slightly from Q2, driven primarily by mix shift. Additionally, during the initial phase of the Model 3 ramp in Q3, the volume produced will be tiny relative to the installed production capacity. As a result, Model 3 gross margin in Q3 will be temporarily impacted by the excessive allocation of labor and overhead costs and depreciation over this tiny volume. In the absence of these one-time elevated cost allocations, Model 3 gross margin in Q3 would already be positive, resulting in a positive cash contribution. As capacity utilization improves, Model 3 non-GAAP gross margin is expected to be positive in Q4, and should improve rapidly in 2018 to our target of 25%. Consequently, we expect non-GAAP automotive gross margin to temporarily dip below 20% in Q3, before recovering in Q4 and beyond.
For the second half of 2017, we expect strong improvement in operating leverage as revenue should significantly increase in the second half of the year as compared to the first half, while operating expenses should remain essentially flat. Capital expenditures should be about $2 billion during the second half of 2017, as we make milestone-based payments for Model 3 equipment, continue with Gigafactory 1 construction, and expand our Supercharger, store, delivery hub, and service networks.
While delivering the first Model 3 cars was a major company milestone, we are now focused on the critical steps to ramp Model 3 production. We remain confident in our plans and look forward to the upcoming unveiling of the next exciting addition to our portfolio of electric vehicles – Semi Truck.
Shares of Tesla are up nearly 4% to $337.45 in after-hours trading Wednesday. TSLA has a 1-year high of $386.99 and a 1-year low of $178.19. The stock’s 50-day moving average is $346.20 and its 200-day moving average is $302.00.
On the ratings front, TSLA has been the subject of a number of recent research reports. In a report issued on July 27, Bernstein Research analyst Toni Sacconaghi assigned a Hold rating on TSLA, with a price target of $265, which represents a potential downside of 17% from where the stock is currently trading. On July 26, Baird’s Ben Kallo reiterated a Buy rating on the stock and has a price target of $358.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Toni Sacconaghi and Ben Kallo have a yearly average return of 21.2% and 9.8% respectively. Sacconaghi has a success rate of 69% and is ranked #204 out of 4638 analysts, while Kallo has a success rate of 59% and is ranked #533.
Overall, 4 research analysts have rated the stock with a Sell rating, 8 research analysts have assigned a Hold rating and 5 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $296.5 which is -7.0% under where the stock opened today.