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Tesla shares volatile on narrower-than-expected 1Q loss but concerns remain

Last updated: 06:54 03 May 2018 AEST, First published: 01:54 03 May 2018 AEST

tesla car
Tesla has only had two profitable quarters since it went public in 2010, but Elon Musk is confident the firm will be profitable in 3Q and 4Q

Tesla Inc. (NASDAQ:TSLA) shares were volatile in after-hours trading Wednesday after the electric-car giant beat expectations with its first-quarter results, although concerns over its cash burn, huge debt pile and production issues remain.

Elon Musk’s company reported a loss of US$3.35 for the opening three months of 2018, narrower than the US$3.58 loss analysts had initially pencilled in.

Revenue for the quarter totaled US$3.41bn, beating the consensus estimate of US$3.22bn.

Shares were jumping up and down in late-trading but were down 1% to US$298 shortly after 5.20 pm in New York. In the 30 minutes after the results were released, the stock traded as high as US$306 and as low as US$300.

On track for 5,000 Model 3s a week in 2Q

While the narrower-than-expected loss and revenue beat will no doubt have pleased some shareholders, other issues seemed to be holding the stock back.

Tesla and its investors are pinning their hopes on the success of the Model 3, which the company expects to “propel electric vehicles into the mainstream.”

The carmaker has repeatedly missed production targets and did so again this quarter, although investors already knew this thanks to an update earlier in the year.

Tesla had hoped to be producing 2,500 Model 3s by the end of the quarter but was forced to backtrack on that as it grappled with production issues in its factory.

The company actually managed to produce 2,020 in the final week of the quarter, although that was still below Bloomberg’s Model 3 tracker which had expected the company to be making 2,323.

Importantly though, Tesla repeated its promise to be building 5,000 Model 3s by the end of the current quarter (second quarter).

“We made significant progress on the Model 3 ramp in the second half of Q1, and the momentum continued into early Q2,” read the earnings letter to shareholders.

“We continue to target Model 3 production of approximately 5,000 per week in about two months, although our prior experience has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time.”

Musk still expects profitability in 3Q and 4Q

If, as Tesla expects, it can get up to that 5,000 mark, it will help the company deliver on one of Musk’s big claims: that Tesla will achieve full GAAP profitability in the third and fourth quarters.

“If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock-based compensation in Q3 and Q4 and we expect to also achieve full GAAP profitability in each of these quarters,” Tesla added.

“This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week and to grow Model 3 gross margin from slightly negative in Q1 2018 to close to breakeven in Q2 and then to highly positive in Q3 and Q4.”

To get to that point, Tesla will have to – and already has – spend a lot of money, which is a major concern for investors and one of the reasons why short-sellers have targeted the stock so aggressively.

Several analysts have claimed that Tesla will need to raise billions of dollars more this year, although Elon Musk has disputed this, claiming that because it expects to be cashflow-positive by the end of the third quarter, there is “obv [sic] no need to raise money”.

At the end of the period, Tesla had US$2.7bn of cash in the bank. It lowered its full-year capex projection to US$3bn from US$3.4bn.

Tesla has also loaded itself with debt – almost US$13bn according to the quarterly report – to try to fund the rapid expansion Musk desires, and it expects to pay out “roughly” US$160mln in interest expenses in the current quarter.

Tesla has only had two profitable quarters since it went public in 2010. It has also repeatedly missed production deadlines.

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