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Macro Outlook: The US rate cut cycle has begun
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Tesla delivers strong Q1 result as expected with momentum intact
Peter Garnry
Chief Investment Strategist
Summary: Tesla Q1 earnings show revenue in line with estimates and adjusted EPS better than expected driven by strong cash flow generation as gross margin excluding regulatory credit hit 22% which is better than the German carmakers' ICE business. The company sold a bit of Bitcoin during the quarter and realized a net gain of $101mn. The company expects 50% growth in deliveries in 2020 which is a bit at odds with the 57% revenue growth expected by analysts as the average selling price was down 13% y/y. But overall good result with no major hiccups or catalysts for either the bulls and bears.
Tonight, we got Q1 earnings from Tesla, one of the most loved and hated companies in the world, showing revenue of $10.4bn in line with estimates and adjusted EPS of $0.93 vs. est. $0.80. The company says it expects to deliver 50% vehicle delivery growth in 2021; consensus is expecting revenue to be up 57% y/y in 2021. This revenue target could be difficult if deliveries are up 50% as the average selling price (ASP) is under pressure across several markets and most notably in China; Tesla’s ASP declined by 13% y/y. Free cash flow is $293mn vs est. $-83mn, and the company has started production of its new updated Model S and expects production to start at its new Berlin Gigafactory in 2021. The solar business also increased q/q with total deployed MV reaching 92 in Q1 2021 up from 86 MV in Q4 2020.
As the chart above shows, Tesla’s business is accelerating to almost 600,000 deliveries on a 12-month basis and cash flow from operations is $8bn with free cash flow at $4bn over the past 12 months. With an enterprise value of $709bn the free cash flow yield is still aggressive compared to other growth companies in a less capital-intensive industry and the main question is still how increasing competition will impact Tesla this year. The company writes several times that it has the best-selling EV globally and will achieve industry-leading margins without mentioning that it has slipped dramatically in market share in Europe the past year. On a positive note, Tesla delivered 22% gross margin excluding regulatory credits which is better than the ICE business of VW, BMW, and Daimler, and delivered through reducing production costs.
The company also announced that it earned $101mn from a Bitcoin sale (net of impairments) without specifying how much of its position it sold although the cash flow statement says it got $272mn in proceeds from selling digital assets.
It worth noticing that out of the $0.93 in non-GAAP earnings per share, $0.54 is stock-based compensation per share, so essentially more than half of shareholders’ profit is shared through stock options with employees. The biggest potential risk is the Q1 report is that inventory is down to 8 days as the company is struggling with parts and computer chips like the rest of the industry. Few words are mentioned on this situation, but it could turn out to be a negative throughout the year.
Overall, strong results as expected but not a blowout quarter for Tesla that is still facing enormous complexity in expanding its production while rolling out new models and battling more competition than ever. This was not the result that will give the bears ammunition except they can still claim aggressive valuation, but the narrative is still intact; Tesla is the best pure play on EV and that will warrant a premium over other carmakers for now. Shares are down 3% in extended trading to $716.
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