Tesla Q1 2020 Earnings Analysis

Alex Alex 05 May 2020
Tesla Q1 2020 Earnings Analysis

Once again, Tesla had a record breaking quarter and once again, it surprised almost everyone, including Wall St, with the stock rocketing up 10% in after hours trading before coming back to earth. A LOT has happened since Q4 2019. We’ve seen a global economic disruption of colossal proportions. And in the rubble of this disaster, it has become blindingly obvious that Tesla has won EVS and everyone else is ****ed. No no no. THEY REALLY ARE ****ED.

Ford and GM have recently drawn on more than $30 billion in combined lines of credit, Ford just announced a $2 billion Q1 loss, borrowed more money at about 10% interest, suspended its dividend and cancelled its Lincoln EV. GM has delayed its hummer EV. I could go on.

Meanwhile, Tesla posted ANOTHER profit, is FLUSH with cash, has a record backlog and reiterated its plans to continue expanding rapidly and maintaining around a 50% compound annual growth rate--maybe 40% worst case.

Q4 2019 marks a tipping point for Wall St sentiment. Even the most arden detractors now face the choice: Should I remove my head from my ass, look at the facts and capitulate, accepting that Tesla is in a dominant position and poised to retain a huge slice of the burgeoning EV market as the world transitions to sustainable transport? Or Do I try--in sad desperation--to cling on to my absurd bearish view in the face of a torrent of contradictory evidence? I don’t say this lightly but you pretty much need to be on the wrong end of the intelligence bell curve to doubt Tesla’s long term viability now. I’m not trying to be rude, I’m just telling it like it is. We’ve seen this play out. Wall St has totally flipped. The finance media has totally flipped. Pretty much everyone has upgraded Tesla stock. We are now seeing four-figure price targets. Big institutional investors have taken or grown large positions and everyone is finally getting it. The question now is not “Can Tesla win?” but “How dominant will they be?” So let’s look at some highlights from Tesla’s Q1 2020 earnings.

Banking Billions

Tesla increased cash in Q1 by $1.8 billion taking their cash and cash equivalents to a whopping $8.1 billion. Let’s rewind to last quarter when I said this about Tesla:

“They've now got a $6.3 billion warchest, capable of seeing them through unexpected catastrophes, a global financial crisis and in more likely scenarios, continued global expansion without the need to raise capital.”

Fancy that. I suggested with $6.3 billion in cash Tesla could weather unexpected catastrophes and a global financial crisis. We got both and Tesla is in an incredibly strong position to gain MASSIVE market share during this downturn. This is the death knell for legacy automotive. More and more eyes will be on Tesla as they continue to expand while just about everyone else scales back and slows down.

Fat Profits

Tesla posted a $283M GAAP operating income in Q1, making it 5 profitable quarters of the last 7 and 3 in a row. This, despite aggressive growth, including international expansion in China Europe, Model Y ramp in the US and temporary factory and supply chain shut downs.

Given Q1 is Tesla’s seasonally weakest quarter, this is a strong line in the sand. One of the most popular bear theses on Tesla was that they'd never make a profit. Admittedly, these comments came mostly from extremely ignorant analysts who were incapable of grasping the idea of investing in scale for future profitability, and who ignored the declining cost curves Tesla was riding, along with the world's inevitable transition to sustainable energy. That's fine. Most of them didn't get Amazon until recently either. The "profitability" argument is truly dead now. In the future, if you hear anyone suggest Tesla can’t make a profit, you know you’re talking to a fool and I highly encourage you to disregard everything they say.

Model Y

Tesla Q1 2020 Earnings AnalysisThe Model Y will make Tesla billions, remember? The Model Y production ramp started in January 2020--almost a year ahead of its original schedule and just 10 months after the prototype reveal. First deliveries occurred two months later. THIS IS ****ING INSANE. Not only does this show the incredible pace of innovation at Tesla but we’ve also learned that engineering and manufacturing innovations like the new heat pump and “octovalve”, and large aluminum castings have led to Model Y being a more profitable vehicle than Model 3. AND Despite being about 10% larger and heavier, its range is within 2% of the smaller, lighter Model 3. This is truly absurd.

But wait, there’s more! Model Y was gross margin positive in its first quarter. THIS IS A MIND BOGGLING FEAT. Tesla selling a new vehicle that is still ramping to volume production, for a profit? INSANE. We’re seeing in real time how quickly Tesla is optimizing, innovating and improving at every level of the business. It’s SCARY. Make sure you’re sitting down first then project this pace of innovation into the future.

No Demand

Tesla confirmed that they continue to see orders flow in from all parts of the world AND that their order backlog is larger than it’s ever been. Yes, a RECORD ORDER BACKLOG. RIGHT NOW. On top of that, Tesla is also doing contactless deliveries while other US automakers can’t do **** until dealerships reopen.

Fat Magins

We continue to see Tesla’s automotive margins march steadily towards 30% despite HUGE investment in growth. Tesla showed a 25.5% gross automotive margin in Q1. A little of this is due to regulatory credits, many more of which are inbound this year but the trend over time is clear. Economies of scale combined, vertical integration, declining battery and technology costs PLUS with software making up a much larger piece of the pie in the future, including Tesla’s announcement on the call that an Autopilot monthly subscription will be launched in the future, mean Tesla will have the luxury of maintaining prices and enjoying ever-larger margins, OR in maintaining margins and cutting prices every time they can. I suspect we’ll see the latter.

Operating Expenses

Tesla’s operating expenses declined to $951 million down 8% quarter over quarter and 13% year over year despite aggressive expansion and operation at an ever-larger scale. This shows how efficient Tesla is becoming with its use of capital and there’s no reason to expect they won’t continue to optimize the business further.

Capacity Expansion

We got a very pleasant surprise in the Q1 report with Tesla disclosing Gigafactory Shanghai will soon reach annual Model 3 production of 200,000 vehicles -- 50,000 more than its initially promised capacity. This speaks volumes about Tesla’s endless optimization. What’s more, Stage 2 of the factory is underway and will produce around 200,000 Model Ys per year when fully ramped in early 2021. That’s 400,000 vehicles per year in China very soon. In the US, combined Model 3 and Y capacity will be 500,000 annually by mid year, with existing capacity for 90,000 S and X combined. In total, by this time next year, Tesla will have global production capacity approaching 1 million vehicles per year, NOT INCLUDING Gigafactory Berlin which itself will add hundreds of thousands more.

Tesla had previously guided that they’d comfortably deliver in excess of 500,000 units in 2020. Even with shutdowns, this is still possible. Everyone else is seeing sales plummet. Tesla is not.

Energy

Where to start? Demand for Tesla’s grid-scale MegaPack far exceeds their ability to meet it. The 100,000th Powerwall was installed in Q1 2020. We learned 40% of Solar customers also buy at least one Powerwall. Talk about cross-sell! And Tesla reached production of 1,000 solarglass roofs per week! We’re at an inflection point, folks. Tesla energy is about to hit the BIGTIME.

Software Technology

Autopilot and full self-driving software continues to improve in leaps and bounds with the release of “Stop sign and traffic light recognition and braking” taking place around end of quarter. The importance of this monumental milestone is twofold. First. This is the last MAJOR piece of the full-self driving puzzle. Autopilot for highways. Smart summon for low speeds and carparks. And now, city driving.

Second, Tesla has a hundreds of millions in deferred revenue for full self driving. As features roll out, this revenue is progressively realised. And this release will account for a huge chunk. And there’s little doubt the take rate of Full self-driving on new orders will increase as its functionality does.

The Outlook

Let’s look at what Tesla guided in their own words. 

Introduction

It is difficult to predict how quickly vehicle manufacturing and its global supply chain will return to prior levels. Due to the wide range of potential outcomes, near-term guidance of net income and free cash flow would likely be inaccurate. We will again revisit our 2020 guidance in our Q2 update.

Volume

We have the capacity installed to exceed 500,000 vehicle deliveries this year, despite announced production interruptions. For our US factories, it remains uncertain how quickly we and our suppliers will be able to ramp production after resuming operations. We are coordinating closely with each supplier and associated government.

Cash Flow 

While near-term cash flow guidance is currently on hold, we are continuing to significantly invest in our product roadmap and long-term capacity expansion plans as we have sufficient liquidity. Model Y production lines in Shanghai and Berlin remain our most important near-term projects.

Profitability 

While near-term profit guidance is currently on hold, we believe we will achieve industry leading operating margins and profitability with capacity expansion and localization plans underway.

Product

We expect that production of both Model Yin Fremont and Model 3 in Shanghai will continue to ramp gradually through Q2. We are continuing to build capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai and remain on track to start deliveries from both locations in 2021. Lastly, we are shifting our first Tesla Semi deliveries to 2021.

Clearly there’s some near-term uncertainty but Tesla’s long term vision, mission and plans are unchanged. They continue to scale, expand and invest aggressively. This is ABSURDLY important. Literally every other automaker is ****ting the bed, axing their EV plans, cutting investment, laying off staff, cutting dividends, bleeding billions, borrowing billions and doing whatever they can to simply LIMP into next quarter in one piece.

Multiple titanics are headed straight for icebergs. Meanwhile, Tesla’s is moving ahead at full speed and their unassailable lead continues to grow at an embarrassing rate. Now that we’ve run through the numbers, let’s listen to some highlights from the call. Actually, there’s only ONE highlight from the call so... Let’s listen to what Elon had to say on one of the most memorable Tesla earnings calls of all time.

we are a bit worried about not being able to resume production um in the bay area and that should be identified as a serious risk um you know that we we only have two car factories right now one in shanghai and one in the area and the bay area produces the vast majority of our cars uh all of s and x and and most of the 3 and all of the y so um the the extension of the shelter in place uh or frankly i would call it forcibly imprisoning people in their homes uh against all their constitutional rights in my opinion and razing people's freedoms in ways that are horrible and wrong uh and not why people came to america or built this country what the fuck excuse me um completely outrageous outrage um so but it will cause great harm not just the tesla but any companies um and while tesla will weather the storm there are many small companies that will not and and all the people's everything people work for their whole life is going to get is being destroyed in real time and we're going to have many suppliers and are having many suppliers that are having super hard times especially the small ones um and it's it's causing a lot of stress to a lot of people you know this is the time to think about the future um and also to ask you know are is it right to infringe upon people's rights as what is what is happening right now um i think the i think the people are going to be very angry about this and are very angry um somebody should be if somebody wants to stay in their house that's that's great they should be allowed to stay in the house and they should not be compelled to leave but to say that they cannot leave their house um and they will be arrested if they do this is this is a this is a this is fascist this is not democratic this is notfreedom give people back their goddamn freedom

Elon definitely has balls. To sum things up, 2020 is Tesla’s breakout year. The one in which EVERYONE will finally see how ridiculously far ahead Tesla is, and how utterly ****ED legacy automakers are.

The global economic disruption works greatly in Tesla’s favor. The smart analysts get it now. The finance media is getting it now. But what is CRYSTAL CLEAR to some, is still a bit vague to others. Tesla has billions in the bank, growing demand, no competition, a huge lead on software, batteries & powertrain technology, an army of fanatical supporters spreading the word, highly profitable products, a record order backlog and very few headwinds. Tesla’s ability to execute is no longer in question, nor are there any concerns about its financial health. My prediction is by end of year, no sane person will harbor ANY DOUBT about Tesla’s viability as a company OR its impending reign as KING of EVs. It’s game over guys. GG.

 Let me know your thoughts in the comments below. Do you agree or disagree with any points? What were your highlights of the Q1 earnings report? And of course, if you have any ideas for future videos, let me know. I read ALL your comments.

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