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Tesla Gains After Reporting Strong Cash Flows: 7 Key Takeaways

Elon Musk's firm reported strong free cash flow growth...and outlined plans to hike its capital spending in 2021 and 2022.
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Revenue growth and higher margins helped Tesla's  (TSLA) - Get Tesla Inc. Report quarterly free cash flow top $1 billion for just the second time in its history.

After the bell on Wednesday, Tesla reported Q3 revenue of $8.77 billion (up 39% annually) and non-GAAP EPS of $0.76. Those numbers respectively beat FactSet consensus estimates of $8.28 billion and $0.56. GAAP EPS of $0.27, which was affected by expenses related to the vesting of stock awards granted to Elon Musk, fell short of a $0.37 consensus.

In line with what was previously shared via Tesla’s Q3 deliveries report, Tesla delivered 139,593 vehicles in Q3, up 54% sequentially and 44% annually. Model 3 and Y deliveries rose 56% annually to 124,318, while Model S and X deliveries fell 13% to 15,275.

Tesla’s richly-valued stock rose 3.2% in after-hours trading to $436.25, leaving it up 421% on the year. The company’s market cap is back above $400 billion.

Here are some notable takeaways from Tesla’s Q3 report and earnings call.

1. Tesla Insists it Might Still Deliver 500,000 Vehicles This Year

As it did in its Q2 report, Tesla said in its Q3 report that delivering 500,000 vehicles in 2020 “remains our target.” Also like in the Q2 report, Tesla admitted that hitting this target “has become more difficult,” following COVID-related production halts earlier this year.

Tesla delivered 318,980 vehicles over the first nine months of 2020. As a result, it needs to deliver 181,020 vehicles in Q4 to hit its target. For comparison, the pre-earnings consensus stood at 166,000.

Tesla's official outlook. Source: Tesla.

Tesla's official outlook. Source: Tesla.

2 Automotive Margins Improved

Officially, Tesla posted a Q3 automotive gross margin (GM) of 27.7%, up from 25.4% in Q2 and 22.8% in Q3 2019.

Excluding $397 million worth of regulatory credits, Tesla’s automotive GM stood at 23.7%, up from 18.7% in Q2 and 20.8% in Q3 2019.

Along with greater manufacturing efficiencies and scale, CFO Zach Kirkhorn attributed the GM growth to more than 70% of deliveries now involving cars that are locally-manufactured (up from less than 50% at the start of 2019), as well as improved vehicle reliability.

Tesla’s company-wide GAAP GM -- impacted by a lower GM for its energy segment, and a negative GM for its services operations -- was 23.5%, up from 21% in Q2 and 18.9% in Q3 2019.

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3. Free Cash Flow Jumped

Tesla generated $1.4 billion in free cash flow (FCF) in Q3, up sharply from $418 million in Q2 and $371 million in Q3 2019.

This FCF growth occurred even though Tesla’s capital expenses rose to $1.01 billion from $546 million in Q2 and $385 million in Q3 2019, as Tesla expanded capacity at its Fremont and Shanghai plants and continued building its planned Berlin plant.

Along with higher revenue and GMs, FCF benefited from a $600 million improvement in working capital related to changes in inventory and receivables levels.

Tesla's quarterly metrics. Source: Tesla.

Tesla's quarterly metrics. Source: Tesla.

4. Tesla Has Dialed Up its Capex Plans

“Looking forward to 2021 and 2022, we have revised up our expectations for capital spending by $2 to $2.5 billion, which we have ample liquidity and expected cash flows to fund,” said Kirkhorn on the call.

He said the increase stems from Tesla’s plans to in-source more manufacturing activity -- including battery cell production, as outlined during Tesla’s Battery Day event -- as well as investments to enable greater capacity expansion in the future.

5. The Energy Business Saw Strong Growth...and Low Margins

Tesla’s energy generation & storage revenue rose 44% annually to $579 million. Energy storage deployments rose 59% to 759MWh; solar deployments rose 33% to 57MWh.

Energy chief RJ Johnson said on the call that Tesla has a “very large backlog” of Powerwall orders, and asserted that (following a recent price cut) Tesla is offering the lowest-cost solar retrofit solution in the U.S.

On the flip side, the energy generation & storage business had a GAAP GM of just 3.6% during the quarter.

6. Musk Cautions Tesla’s Berlin and Austin Ramps Will Take Time

Tesla reiterated that it plans to start vehicle production at its Berlin and Austin plants next year. However, Musk also cautioned that production will “start off very slowly at first,” with full ramps taking 12 to 24 months.

Tesla's Fremont plant is currently said to have a Model 3/Y production capacity of 500,000 vehicles/year, and a Model S/X capacity of 90,000 vehicles/year. Its Shanghai plant is said to have a Model 3/Y capacity of 250,000 vehicles/year.

7. Cybertruck Deliveries Might Start in Late 2021

“If all goes well, we will be able to do some Cybertruck deliveries towards the end of next year,” said Musk on the call. “I would say [there are] probably a lot of deliveries in 2022 and some deliveries towards the end of next year if things go well.”

At the same time, Musk said that Tesla still needs to address battery cell production constraints before it can ramp production of its Semi truck “to significant volume.” Tesla forecast in its Q1 report that it would begin delivering the Semi in 2021.