Tesla Is Plunging, but It's Not Why You Think

Updated from 10:48 a.m. to include thoughts from Goldman Sachs analyst.

NEW YORK (TheStreet) Tesla Motors (TSLA) may have posted first-quarter earnings that beat analyst forecasts and given investors an enticing update about its Gigafactory, but Wall Street has other issues on its mind: namely, that Tesla is going to be free-cash flow negative this year as the carmaker continues to spend money on capital expansion in order to grow for the long term.

When the company reported first-quarter earnings yesterday, Tesla CEO Elon Musk noted that the company is going to invest between $650 million and $850 million this year, as the company builds out its Gigafactory, as well as continuing to build out its service centers, Supercharger network and the continued design of the Model X, due out later this year.

"We still plan to invest $650-850 million for the year in capital expenditures for increased production capacity, growth in our store, service center and Supercharger footprints, Model X and S development and start of Gigafactory construction," Musk said in the shareholder letter. As a result, he expects Tesla to be cash flow negative for 2014, before "considering the equity required for leasing."

As a result, shares were down sharply in Thursday trading, off 10.3% to $180.70.

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For the first-quarter,Tesla earned 12 cents a share on a non-GAAP basis, generating $713 million in revenue, as it delivered 6,457 Model S units. The company produced 7,535 units for the quarter, but the rest of them are in transit to Europe and Asia, where Musk noted the company is seeing exceptional demand. "I really don't think we have any kind of demand challenge in China," Musk said on the conference call. "I was blown away by the level of interest and enthusiasm in China from people at all levels, people in government, industry and consumers. I'm really optimistic at how things will go there."

Karl Brauer, senior analyst for Kelley Blue Book, noted Tesla's story is more about where it can go in the future, as opposed to what it's doing now. "The fascinating thing about Tesla is how its earnings remain a small part of what drives interest in the automaker," Brauer said in emailed statements. "Its latest earnings report shows continued progress, and China could be a huge cash cow for the company if Tesla can fully leverage that market. But I think investors are waiting to see substantial progress on the Model X crossover and proposed battery factory."

Analysts surveyed by Thomson Reuters were expecting Tesla to earn 10 cents a share on $699.09 million in revenue.

Palo Alto, Calif.-based Tesla is still constrained by battery cell supply, and Musk noted that would continue to be the case for the second quarter, but improve in the third quarter thanks to a deal the company signed with Panasonic late last year.

Concerning the Gigafactory, Musk noted that Panasonic had signed a letter of intent with Tesla to be a partner for the massive factory, and that there's a joint working team between the two companies already working out some initial details. Musk said Tesla was "highly confident" of getting the 30% cost cut in kilowatt hours for the battery, in order to achieve the $30,000-$40,000 initial price point for the Gen III car.

Musk did go on to say that California, which was not part of the initial four states listed for the Gigafactory (Arizona, Nevada, New Mexico and Texas), was back in the running for the Gigafactory, but that it was improbable the state would get the plant, due to difficult rules and regulations surrounding building permits and greenfield sites. Musk also confirmed that Tesla was building two Gigafactories simultaneously in two different states to allow for any problems and regulations. CFO Deepak Ahuja noted it's really critical that the first Gigafactory is on time, stating that every one month delay is worse in cost than building two sites at one time.

For the second quarter, Tesla said it expects to deliver about 7,500 Model S units, as the company looks to surpass 35,000 Model S deliveries for the year. The car manufacturer is looking to produce between 8,500 and 9,000 cars for the quarter, up 13% to 19% sequentially.

With regards to the Model X, that's accounting for the majority of the R&D spending, as the company gears up for initial production of the vehicle in the fourth quarter, with deliveries in the second quarter of 2015. Musk stated Tesla was late on the Model X relative to the company's earlier forecast, as the Model S had to be perfected and brought to international markets. "We're in pretty good shape on the S front, so there's heavy focus on the X front and making sure it's a phenomenal product."

Musk went on to say that the production ramp for the Model X will be much greater than it was for the Model S.

Following the quarter and the conference call, analysts were cautiously optimistic on the future of the company, with several lowering price targets due to the enormous amount of investment this year, as it ramps up spending. Here's what a few of them had to say:

UBS analyst Colin Langan (Neutral, $200 PT)

"TSLA's Q2 guide of 'marginally profitable' is well below cons. EPS of $0.23. The weak guidance reflects higher R&D costs (guide +30% q/q) and SG&A (+15% q/q) primarily related to Model X development while gross margin was guided 'up slightly'. Moreover, TSLA's Q2 guide on Model S deliveries of 7.5k units also missed cons. of ~8.45k; FY guide of >35k implies a 51% increase over H1. Management expects Q2 production of 8.5-9.0k, up only 16% q/q constrained by battery cell supply but expected to improve in Q3. On a positive note, TSLA noted that Panasonic has signed a letter of intent for the Gigafactory & a final agreement is expected by year-end. Tesla also noted that it will start production in China in the next 3-4 years, to serve domestic Chinese demand."

Deutsche Bank analyst Rod Lache (Hold, $220 PT)

"Tesla's results were better than expected. Tesla reported non-GAAP EPS of $0.12, compared with DBe of breakeven. We anticipated a number of significant drags this quarter, including sequentially lower revenue (customer deliveries were below production as vehicles were on ships on their way to Europe and Asia), and a significant ramp-up in operating expenses. These developments were in-line with our expectations. Nonetheless, operating results slightly better than we anticipated."

Morgan Stanley analyst Adam Jonas (Overweight, $320 PT)

"1Q results were in line on gross margin, while weaker at OP due to ramping R&D and SG&A, taking full year estimates down considerably. Giga factory partnerships have yet to come together, leaving TSLA in a sensitive position of breaking ground without having the team formally in place."

Barclays Capital analyst Brian Johnson (Neutral, $220 PT)

"Management noted that Model S demand is robust, and deliveries are still production-constrained; it aimed to quash fears that U.S. Model S demand is modest, commenting that Model S orders in 1Q were up 10% sequentially. However, we continue to see some risk of U.S. Model S demand plateauing, with increased competition from BMW also adding to the risk. Rather, by the end of the year, we expect incremental demand will be largely driven by China. Amidst challenged near-term momentum, we reiterate our EW rating and $220 PT."

JPMorgan analyst Ryan Brinkman (Neutral, $163 PT)

"Tesla reported 1Q results Wednesday which, while impressive overall and evidencing continued solid progress, were only roughly in-line with Street and JPM expectations, and did not reveal significant incremental news flow or feature substantially raised production or delivery guidance. Furthermore, in a move reminiscent of 3Q last year, the firm guided to continued large sequential increases in operating expense which is likely to have the effect of depressing near-term consensus estimates (our own forecast falls modestly). Tesla is clearly unique in many respects amongst our coverage, but it is likely worth pointing out that the trend this earnings season has been for autos and auto parts firms to trade
off modestly on even strongly better results, and for Tesla the bar was likely set higher than for most."

Goldman Sachs analyst Patrick Archambault (Neutral, $200 PT)

"While the quarter posted a headline beat shares fell 7.6% in the aftermarket, which we believe was due to the following factors: 1) 1Q deliveries of 6,457 and 2Q guidance of 7,500 came in below StreetAccount consensus of 6,600 and 8,450, respectively, implying a steeper back-end loaded curve to the company's 35k target which some had thought was
conservative, and 2) steeper opex guidance for 2Q which we believe carries through to higher full year 2014/2015 SGA/R&D expense than many had modeled. Regarding volumes, the 1Q14 run rate of Europe and NA sales implies about 10k incremental sales are needed from Asia to hit 2014 guidance which seems very doable if Europe and NA registrations hold
steady and we think that will remains a key focus in coming quarters. We have less trepidation on the opex front as current Street implied 2015/2016 operating margins of 11% and 15.7% seem to be ignoring company comments that outsized R&D and SGA would keep margins below the mid-to-low teens run rate targeted over the next few years."

Wedbush Securities analyst Craig Irwin (Outperform, $275 PT)

"We see strong positives in Tesla's credible path to longer-term battery cost reduction and the Gen-III vehicle target costs, and what we believe will be a receptive buying public willing to purchase EVs while retaining reasonable expectations for these vehicles. Tesla's multi-year lead over credible competition suggests the company is well positioned to deliver an aggressive volume ramp."

Also See: Tesla Q1 Earnings Live Blog

Also See: Here's the Biggest Risk With Tesla's Gigafactory

Also See: Tesla Sets Way For Future Growth

--Written by Chris Ciaccia in New York

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