Tesla's unexpectedly good Q3 results top estimates
Ricardo Moraes/Reuters
Main page Finance, Tesla
Hot topic
Oct. 27, 2016
4338 4k

Tesla's first profit quarter after 12 consecutive quarters of losses gives the company a head start before the launch of the mass-market Model 3 and the controversial acquisition of SolarCity.

Seems like Musk has actually achieved what he promised this time. Only last month, Elon Musk sent out a company-wide email asking the employees to rally the troops and produce "every car we possibly can" to impress the investors:

“It would be awesome to throw a pie in the face of all the naysayers on Wall Street who keep insisting that Tesla will always be a money-loser,” Mr. Musk wrote.

Not many believed in Musk's yet another "crazy idea" and the market had been relatively quiet prior to yesterday's Q3 results announcement. According to the Wall Street Journal's analysts, it was hard to count on Musk's ambitious earnings promises this time as Tesla has failed to fulfil more than 20 Musk's projections in the last 5 years.

However, this time was different. Tesla Motors (NASDAQ: Tesla Motors [TSLA]) revealed its Q3 results after the bell yesterday and surprised the analysts with actual profits. Q3 of 2016 is officially the best Tesla's quarter for sales, with 24,821 vehicles delivered, which is slightly higher than the initial target of 24,500. This number included 15,047 Model S sedans and 8,774 Model X SUVs whereas year-over-year car deliveries increased by whopping 114% this quarter.

Adjusted earnings per share for this quarter were at $0.71, which is shockingly far away from Wall Street's prediction of $0.02. This high EPS resulted in a profit of $111 million that is the first Tesla's quarterly profit since the beginning of 2013. Revenue was reported to be at $2.3 billion, well outperforming $1.9 billion predicted by the analysts and up 45$% YOY. Tesla expects to be profitable in the fourth quarter, as well.

"The Tesla third quarter results reflect strong company-wide execution in many areas. Furthermore, we expect this to continue into Q4 and project positive GAAP net income (excluding non-cash stock-based compensation) despite ZEV credit sales in Q4 likely being negligible. We set new records for vehicle production, deliveries and revenue, which led to GAAP profitability and positive free cash flow (cash flows from operations less capital expenditures). At the same time, GAAP total automotive gross margin and gross profit per car increased substantially," the company wrote in a statement yesterday.

Shortly after the results were announced, TSLA stock jumped over 5% or $11.26 to about $213 per share in the after-hours trading. Before the results' announcement, Tesla's shares had fallen almost 16% year-to-date, reports ETF Daily News. This definitely made the day of Tesla's investors yesterday.

Next to that, the company reaffirmed its guidance to deliver 50,000 new vehicles in the second half of 2016. And, considering the number of deliveries this quarter, it seems to be quite realistic for the company in Q4. However, the fourth quarter will be different from this one as it includes the holidays season, says the company:

"Despite the challenges of winter weather and the holiday season. We expect about 30% to 35% of these deliveries to be accounted for as leases for revenue recognition purposes," the company said in a letter to shareholders.

The company also added that the construction of Gigafactory remains on plan and will be finished on time to support the high production volume for Model 3 that was promised to reach its first pre-order owners next year. In general, positive Q3 results come in useful for Musk right at the moment when he is about to receive shareholders' vote on the SolarCity (NASDAQ: SCTY) merger that he has been heavily criticized for.

In Q3, Tesla announced its acquisition of a struggling solar-panel manufacturer SolarCity for $2.6 billion in stock plus the company's $2.8 billion of net debt that Tesla would need to deal with. Ever since Musk announced his plans for this acquisition, Tesla's shares lost 15.8% of their value whereas SolarCity's stock was down 30.8%. But with the impressive Q3 results, Musk could make a better case that Tesla is ready to handle the merger with SolarCity that would inevitably requiring additional cash.

Musk plans to "rally the troops" to impress investors

According to the Wall Street Journal, the combined company will need to raise approximately $12.5 billion through 2018 in order to cover for expenses. Musk will host an event tomorrow night to share his plans for SolarCity by presenting a new version of a solar roof product that works together with Tesla's upgraded Powerwall battery. Tesla described it as “an integrated solar roof with next-generation energy storage and EV charging”, in yesterday's statement.

Nevertheless, despite calling on his employees to ramp up the production volume in Q3 as a way to "convince potential investors", Musk has recently announced that his company was not interested in raising funds this year anymore.

When asked whether Tesla would raise funds in 2017 instead of this Q4, he tweeted "Probably not then either". Tesla's spokesperson declined to comment on this.

Musk confirmed his statement dating October 9 yesterday, saying that Tesla doesn't need to raise additional funds this year to support the Model 3 launch. Though he added that he cannot predict everything:

“There could be unexpected negative things that occur; there could be some global, macroeconomic slowdown…Who knows what could happen?” he said, as reported by the WSJ.

Some investors may claim that this quarter is just a result of Musk's 5-week optimization plan that he talked about in his September's email and we should not expect this record-high performance to be sustainable in the long-term. However, what this quarter did prove is that Musk is (sometimes) capable of putting his aggressive business ideas into life. And this could be enough to convert some new investors into Tesla's believers.

"Honestly, this could be the quarter that converts some (this reporter included) who have doubted Elon’s ability to make Tesla a profitable company and start hitting the crazy production deadlines and goals he sets. Then again, let’s see what happens when SolarCity gets tossed in the mix," said MarketWatch's analyst Jeremy C. Owens yesterday during his "live" coverage.

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