3 Biggest Takeaways From Tesla's Third-Quarter Earnings

Tesla Motors seems to have figured this Wall Street game out -- it's about deliveries, deliveries, deliveries.
By Chris Ciaccia ,

Updated with the Tesla stock price for Wednesday.

Tesla Motors (TSLA) - Get Report seems to have figured this Wall Street game out -- it's about deliveries, deliveries, deliveries.

The electric vehicle maker, led by CEO Elon Musk, said it would deliver between 17,000 and 19,000 vehicles in the fourth quarter, alleviating concerns that it would miss estimates once again. For the full year, Tesla said it would deliver between 50,000 and 52,000 vehicles, including several hundred of the newly launched SUV, the Model X.

For the third quarter, Tesla lost an adjusted 58 cents a share on $1.24 billion in revenue. Analysts surveyed by Thomson Reuters expected the company to lose 50 cents a share on $1.26 billion in sales.

As the company ramps up deliveries and production of the Model X, the first fully electric SUV, the company said it expects gross margins to eventually hit around 30%. Gross margins, excluding zero emission vehicle credits, were 23.7% on a non-GAAP basis in the third quarter.

Shares of Tesla were soaring in Wednesday morning trading, up more than 9% to $228.

The company also announced that the Gigafactory and the Model 3 are on schedule. Musk wrote in a shareholder letter that the company has "accelerated plans to begin cell production for Tesla Energy products at the Gigafactory by the end of 2016," coming in several quarters ahead of what Tesla has said previously.

Palo Alto, Calif.-based Tesla also said capital expenditures for the fourth quarter would be around $500 million as it continues to fix tooling for its factory in Fremont, Calif., and the continued ramp-up of the Model X.

Here are the three biggest takeaways for Tesla's third quarter.

Model X Relief

There was concern from investors that due to the high price of the Model X Signature Series, its appeal would be limited. That isn't the case, however.

Credit Suisse analyst Dan Galves was encouraged that fourth-quarter delivery guidance was not cut because of the high cost of the Model X, which will reach production of several hundred units per week by sometime in December.

"Other important outlook statements were that Model X signature reservations are converting to orders at a higher rate than Model S in 2012, gross margin will only be down ~100bp's sequentially in Q4 and should be at 30% w/in 18 mths. Capex will be 'clearly lower' in 2016, and Energy Storage production will begin in earnest in early 2016 (at Gigafactory)," Galves wrote in a note to clients.

Tesla also confirmed publicly that it would be releasing a lower-cost version of the Model X, saying the next SUV would have a smaller battery pack.

Go Go Gigafactory

Tesla's future is tied to the Gigafactory and the Model 3. The company previously said the two need to come online within a couple of months of one another to ensure the viability of producing a mass market car at volume.

The company said that Gigafactory construction is ahead of plans, something it has said in the past as well.

Perhaps more encouraging is the fact that the company said Tesla Energy products just recently started at the Gigafactory, well ahead of the company's schedule. Cell production is also expected to start in the second half of 2016, ahead of Tesla's internal schedule, with vehicle cells being produced in 2017.

That alleviates concerns that Tesla would not be able to get the Model 3 up and running on time.

Cash Will Always Be a Concern

For an automotive company, cash burn is a concern, but Musk said he's optimistic about being free cash flow positive by the first half of 2016. "I do emphasize, this is an aspiration, not a promise, but our aspiration is to be positive cash flow in Q1," Musk said on the earnings call.

The company ended the quarter with $1.4 billion in cash, after raising $739 million during the quarter, but concerns about high levels of cash spend should slow down in the near term, outgoing Chief Financial Officer Deepak Ahuja said.

Deutsche Bank analyst Rod Lache wrote that he feels better about the company's cash levels, with an assumption the company will spend around $300 million per quarter on capital expenditures.

"While we're feeling better about the trajectory to positive free cash flow, significant questions remain about Tesla's intermediate term profitability and cash flow targets as the company scales up to Model 3 and Gigafactory production," Lache wrote to clients. "The level of capital deployment and risk taken by Tesla (including innovation in areas that are tangential to EV manufacturing, such as door closures, windshields, and seat structures) remains a significant concern. That said, we also believe that Tesla's innovations (in electric vehicles, autonomous driving, and in mobility paradigms) have potential to create significant value."

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