Tesla's earnings mark the car industry's 'Windows 95 moment' Tesla's earnings mark the car industry's 'Windows 95 moment' Tesla's earnings mark the car industry's 'Windows 95 moment'

Tesla's earnings mark the car industry's 'Windows 95 moment'

Equities 7 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Tesla's Q3 earnings saw the company report a surprise quarterly profit with earnings per share coming in at $2.90 versus a forecasted $0.15 loss.

Tesla delivered its Q3 earnings last night after delaying the release for one week. This was seen as a sign of strength, and that anticipation proved correct.

Here are the headline numbers:

• Q3 adjusted earnings per share at $2.90 versus a forecasted $0.15 loss
• Q3 free cash flow $881 million versus a forecasted $280m
• Guidance is for positive Q4 numbers on net income and free cash flow
• Q3 revenue growth is 129% year-on-year to $6.82 billion. Consensus expects revenue of $35.5bn in FY’20
• Deposits only marginally down despite a strong uptake in deliveries. This indicates strong underlying demand for Tesla cars.
• Model 3 deliveries in Europe to start early 2019
• Model 3 production in China to start in 2019 to local customers only and using locally sourced components
• Automotive gross margin 25.8% (25.5% excluding govt credits) up from 18.3% a year ago

The results basically confirm our October 2 comments (‘Are markets underestimating Tesla?’).

Here is my take away on Tesla:

With its Q3 numbers, Tesla just created nothing less than the car industry’s ‘Windows 95 moment’ – the industry is changed forever and the uptake will likely be massive. Tesla is showing that it is way ahead of the competition in electric vehicles, or EV; it is also now hurting even internal combustion engine (ICE) volume. 

Daimler’s latest profit warning, for example, was partly driven by sharp declines in its luxury segment in the US where Tesla is eating market share. In the wake of Tesla's strong quarterly numbers, we see the firm's default probability significantly lower as a result (see chart below); Tesla bonds could see heavy bidding over the coming quarters.

If Tesla’s run rate on free cash flow is now 4 * 881 = 3,524m (it’s too early to say with confidence), then its current free cash flow yield is 5.9%. Compare this to Toyota’s FCF yield of 6.9%; in this light, Tesla suddenly doesn’t look that expensive. Volkswagen and BMW are both running negative FCF and BMW has had negative free cash flow for the past six fiscal years. I think the German carmakers have re-enacted Nokia versus Apple – they were too arrogant and too slow.

Another interesting observation concerns Tesla’s less-discussed Energy division. Revenue there was $399.3m, up 26% y/y with gross margin at 17.2%. Distribution has always been the biggest issue for solar companies due to high customer acquisition costs. With a current base of 450,000 Tesla car owners, the company increasingly has a large and easy-to-tap customer base for energy production and storage sales. 

My take is that the energy division will be a big positive surprise for shareholders going forward. 

There do remain some notable risks ahead for Tesla:

• Elon Musk is still a key risk
• Tariffs are a negative on gross margin
• Higher interest rates could curb demand
• Consumer Reports has recently lowered its ratings of Tesla cars
• Competition is rolling out competing EVs over the coming years
• Management exodus is elevated
• Higher commodity prices on lithium and cobalt
Tesla default rate (white line)
Tesla default rate (white line, source: Bloomberg)
Tesla volume and sales v. competition in cars (excl. the pickup segment, which is larger in the US)
Tesla volume and sales v. competition in cars excluding the pickup segment, which is larger in the US (source: Saxo Bank, CleanTechnica, and EV Obsession)
Autos underperforming global equities
Source: Bloomberg, Saxo Bank
Energy Storage deployed
Source: Tesla Q3 release
TSLA (daily, five-year, source: Saxo Bank)
TSLA (daily, five-year, source: Saxo Bank)


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992