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Tesla's Next Big Delivery Shouldn't Be Too Far Off

Oct. 3, 2016
Tesla, as it has said itself, needs to raise money before the end of the year, and demonstrating growth is the key to unlock that particular door. 

So now we know: Tesla Motors sold more cars than expected in the third quarter.

And that's all we know. Still, investors judge that tidbit to be worth north of $1 billion, judging by the pop in Tesla's stock Monday morning.

That reaction is really all that matters at this point. Tesla, as it has said itself, needs to raise money before the end of the year, and demonstrating growth is the key to unlock that particular door. Those reported sales of 24,500 cars in the quarter just ended will tick several boxes:

Year-over-year growth of 111% is just a fantastic headline number. It shows Tesla can actually hit or exceed a sales target after two consecutive misses. Provided implied guidance for the fourth quarter works out, Tesla will come within spitting distance of its 80,000-vehicle annual sales target. They suggest the controversy and investigations around the company's Autopilot feature haven't deterred too many buyers.

What Tesla's sales update doesn't tell you, of course, is whether those new cars did anything to bolster or harm its margins. My guess errs toward the latter, partly because Tesla already effectively cut its guidance on gross profit margin for the second half when it reported its previous set of quarterly results and because it launched (or rather, relaunched) a cut-price version of the Model S sedan in June. The last time Tesla reported a surge in deliveries was the fourth quarter of 2015, when a 78% jump in sales helped the company scrape its (reduced) annual guidance--and its gross margin slumped:

That weird episode last week where CEO Elon Musk emailed his employees to stamp out (alleged) discounting of cars also raises the risk that the push for sales growth might come at a cost further down the profit-and-loss statement.

In another email from late August--reported by Bloomberg--Musk exhorted Tesla's staff to go all out in boosting sales and cutting expenses in the third quarter in order to show positive GAAP profits and cash flow and "throw a pie in the face of all the naysayers on Wall Street." The latest sales numbers suggest Musk is readying his throwing arm.

Yet it's odd he wants to throw pie toward lower Manhattan, which is actually home to one of Tesla's biggest, and most dogged, set of fans. On the whole, despite some caution creeping in over the past 12 months, sell-side analysts remain supportive, with 15 out of 21 calls tracked by Bloomberg recommending investors buy or hold Tesla's stock. Moreover, the consensus forecast is for Tesla to eke out a GAAP operating profit of $17.4 million in the third quarter (albeit down from an estimate of $75.6 million as recently as the beginning of August, Bloomberg data show). It's possible that, with these higher sales and enough belt-tightening, Tesla can actually achieve some sort of positive number at the operating level.

But it seems beside the point anyway (something of a theme when it comes to Tesla). Investors were willing to add another $1 billion or so to Tesla's already giddy valuation on Monday just on the basis of the sales number. And that's despite knowing, from an email sent by Musk himself, that the company has been straining every last muscle to present its best self when it reports third-quarter numbers, precisely so it can go and fund-raise off the back of them. What makes this apparent buzz around one, very well-telegraphed quarter even stranger is that the fundamental "buy" case for Tesla's stock is founded entirely on the promise of big, positive cash flows materializing sometime in the 2020s.

And investors appear to be unconcerned about some really pressing questions, such as why Tesla hasn't disclosed updated order numbers for the Model 3 or whether the SolarCity deal is going to be delayed significantly by legal challenges. The spread between SolarCity's stock price and Tesla's implied offer has come in of late, indicating growing expectations it will go through. However, it widened back out again on Monday morning to about 14% and, in any case, threatens to merely compound Tesla's cash burn if the deal is consummated.

With those issues looming, Musk should forget the pie and, while he's at it, also forget waiting around for third-quarter results. Based on Monday's reaction, he should just be throwing new paper Wall Street's way as quickly as possible.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


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