A Tsunami of money could be headed Tesla's way in the next year — and that’s bad news for the bears
Matthew DeBord 0m
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Tesla Model 3
Bears in the headlights? Hollis Johnson/Business Insider
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Tesla investors have been preoccupied with the Model 3, Elon Musk's behavior, and the promise of profits — but they've been overlooking Tesla's potential surge in revenues.
Tesla could see massive topline improvements over the next year and a half.
If Tesla can ride out its current assorted crises, this ocean of forthcoming cash could take the company to a new level and undermine the bear thesis.
If you've been closely following Tesla and CEO Elon Musk for the past six months, you could be forgiven for thinking that the company is on the ropes and that Musk's days are numbered.
There was the first-quarter earnings-call outburst. The Twitter feuds. The mini-sub fracas. The open letter begging Musk to cool it.
Meanwhile, Tesla's business continued to chug along. The carmaker will report second-quarter earnings in a few weeks, and while the "earnings" are again expected by analysts to be extremely negative and Tesla's cash-burn anticipated to be staggering, revenue should continue a trend.
Tesla has been adding about $200 million to the topline every quarter for several years. In only one of those recent quarters — Q3 2016 — did the company post a profit, due largely to the sale of a zero-emissions credits, which Tesla can stockpile thanks to its status as an automaker that sells only electric vehicles.
Forgetting about the company's solar and energy-storage businesses, automotive revenue has come via the high-priced Model S sedan and Model X SUV, both of which sell for around $100,000 on average. Last year, Tesla delivered about 100,000 examples of these vehicles and should repeat that in 2018.
This brings us to the Model 3, Tesla's less expensive and much-troubled vehicle. After launching in July of 2017, the Model 3 has endured a fraught birth, routinely failing to hit production targets. Teslas celebrated a run-rate of 5,000 Model 3's per week at the end of June, a pace that may or may not be sustainable.
But lost in the brouhaha over Tesla's woes as a manufacturing enterprise is the simple fact that if 5,000-per-week could be tough to sustain, 2,000 per week should be far easier. And the Model 3's Tesla is now building aren't the el-cheapo $35,000 versions; they're the costly upmarket trim levels, with the most expensive topping out at nearly $80,000.
Over a six-month period, that translates into $2.4 billion in revenue — or, by my math, over ten times in topline improvement in two quarters, rather than a time period of more than two years at Tesla's historic rate of growth.
That's a tsunami of cash on the way for Tesla, and I've been conservative in my estimates. Very conservative.
There's no guarantee that the surge in revenue will convert to bottom-line profits. Tesla might still have to raise funds in 2018 or 2019. But the intensified cash-flow is going to be an issue for Tesla bears. A major issue.
Here's why:
Despite Tesla's wild ride in 2018, the stock is flat.
Despite Tesla's wild ride in 2018, the stock is flat.
Markets Insider
Since the beginning of 2018, Tesla stock has surged and retreated, but headed into Q2 earnings, at around $320 per share, is only down 1% year-to-date.
Over a 12-month period, it's down 2.5%. If you move out five years, it's up over 160%, and all-time, it's returned more than 1,000%.
The takeaway here is twofold. For the bulls, the situation is tricky because much of the upside could have passed, leaving Tesla as a less go-go investment for the future, even if revenues explode and profits arrive.
For the bears, it's clear that wagering on the bad news has been sucker's bet. Tesla's big institutional investors haven't raced for the exits, and shares have fended off many waves of negativity.
Both sides have a challenge, but for the bears, it's really a game of beat-the-clock against the topline. Tesla could lose 50% of its pre-orders for the Model 3 and still have 200,000 on the books. And sustaining production for the vehicle at a modest 2,000 per week still means about $5 billion in additional annual revenue.
That might not get it done with some of Musk's more ambitious goals — semi-trucks, pickup trucks — but it will be tough for naysayers to avoid drowning in a small sea of new cash.
Reviews of the Model 3 have been mostly positive.
Reviews of the Model 3 have been mostly positive.
Hollis Johnson/Business Insider
I drove the Model 3 earlier this year and thought it was terrific. Other reviewers have been similarly impressed.
There have been some complaints about build quality, but there were complaints about build quality for the Model S and Model X when they first launched. And the majority of Model 3 buyers, panel gaps and other manufacturing issues aren't going to register — as long as the car serves up its Tesla-ness, looking cool and high-tech, owners will be delighted.
Even if stuff goes wrong, I suspect Tesla will continue what I like to think of as its infinity warranty and fix any and all problems.
Counter to what some Tesla super-enthusiasts believe, the company isn't going to take over the world. But if it continues to sell vehicles that customers adore, for the most part, the cash flow won't just increase, it will become very dependable.
