Today Tesla Motors released preliminary quarterly financial results figures through a shareholder letter (as is Tesla’s customary practice, a 10Q giving official figures will be published in a couple weeks). The good news is the manufacturing rate was 11,160 vehicles (10% better than guidance), averaging more than 1000 cars built per week, and sales rate was over 10,000 vehicles. The bad news is Tesla is running at a big loss – which is surely causing many to moan about “how long can Tesla keep this up?” The heavy losses each quarter makes Tesla Motors look like a failure, and that the company’s imminent demise is just around the corner.
Is this true?
GAAP loss for Q1 2015 was $151 million, up from Q4 2014 GAAP loss of $103 million and Q1 2014 GAAP loss of $50 million. That’s a significantly higher loss, especially as Cash fell from $1.9 billion in Q4 2014 to $1.5 billion in Q1 2015. That gives the company about 3-4 quarters worth of cash on hand and the current rate cash is disappearing from their bank account.
By the way, I’m not a stock analyst and I probably just proved it. What I did do is listen to the Tesla Motors quarterly financial results conference call for stock analysts, and have read the shareholder letter, and there’s a clear story to tell about the increasing losses.
Namely: Tesla Motors is obviously in a phase of heavy capital expenditures to increase production capacity. Namely:
- Ramping up for Tesla Model X production
- Ramping up for Powerwall and other Tesla Energy products
- Building the Gigafactory
- Expanding the production facility in Lathrop
The supporting evidence I see in the shareholder letter is that “Property, Equipment” assets increased from $1.8 billion in value in Q4 2014 to $2.2 billion in Q1 2015. That asset increase coincidentally (or not) is similar to the decrease in cash on hand. If I understand it correctly — Property/Equipment increases are a side effect of capital expenditures. What Tesla is doing is buying and installing manufacturing equipment, and building factory buildings. Both activities involve spending money to build more assets.
The shareholder letter listed installation of a new body shop, paint shop and stamping presses. During the conference call, Elon Musk said the factory in Lathrop is focused on “Casting and Machining”, and that they’re expanding that facility as well. The purpose of all this is to grow Model S and Model X production capacity.
In other words, Tesla Motors is spending money today to increase production in a few months time. The order in which this is slated to occur is:
- Summer 2015 – Powerwall and other Tesla Energy products begin selling in small quantity
- Late Summer or Fall 2015 – Tesla Model X begins small scale production, with a quick ramp-up to full production (I think this means 1000+ X’s and 1000+ S’s per week) in about 2 months
- Sometime in 2016 the Gigafactory will be built enough to start producing battery systems for both Tesla’s automobiles and the Tesla Energy products
- April-ish 2016 – the Model 3 will be shown to the public
- Late 2017 – The Tesla Model 3 will go into production
The 2 month ramp-up rate for Model X production is going to be lots faster than for the Model S. The Model S began sales in June 2012 but they very slowly ramped up production. Today, Elon Musk said there were lots of issues with the early S’s – which the customers reported as well. What they’re doing different this time is to produce a “Captive Fleet” of several hundred Model X’s that they’re already driving around and checking carefully. The idea is to iron out the issues using the Captive Fleet before shipping cars to customers.
Another business activity they’re undertaking is to improve “operational efficiency”. One example given was to ship cars by train rather than by truck, because it’s much lower cost. Another example was they hope to reduce the mad scramble at the end of quarters, presumably (not explicitly said) this scramble is to cram more sales into the quarter to meet expectations they’d given to analysts. The last example given was to further reduce the labor hours required to produce each car.
The shareholder letter reiterated the goal of delivering about 55,000 Model S and Model X cars to paying customers in 2015. With 10,000 deliveries in Q1, they’ve got 45,000 to go which equates to 15,000 per quarter. During the analyst call, Musk said production would be doubling in Q4 thanks to all this capital expenditure now.
Bottom line – don’t worry – be happy that the electric car production rate is increasing. The only worry is if Tesla Motors runs into supply difficulties with some part or another, or for some reason the plans derail. Who knows, maybe that flurry of earthquakes in Concord a couple days ago is a precursor to The Big One – and because the Fremont factory is near the Hayward Fault the factory will be damaged …?
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