- Tesla posted a strong third quarter in 2018; the fourth quarter should also be profitable, but weaker than the previous financial period.
- It will be interesting to see whether quarterly revenue continues its significant improvement. The Tesla top line was nearly $US7 billion in the third quarter.
- The more complicated questions for Tesla are about how it will satisfy its capital needs in 2019.
Tesla will report fourth-quarter and full-year 2018 earnings on Wednesday after the bell.
After posting a blowout third quarter, with nearly $US7 billion in revenue and a much fatter profit than expected, Tesla should pull back in the fourth quarter.
But I’ve already complicated matters. There are essentially two things you need to know before the company reveals the numbers and CEO Elon Musk talks to Wall Street analysts to attempt to better disguise his barely disguised (and perhaps justified) contempt:
- Tesla will post a quarterly profit.
- The profit will not be as big as it was in the fourth quarter.
That’s it! That’s all you need to know. Nothing more to see here.
Yes, if Tesla can manage a fourth-quarter profit – something in the ballpark of $US1 per share, versus almost $US3 per share in the third quarter in 2018 – it will be the company’s first-ever sequential positive bottom-line result. Given that losses for the first half of 2018 were massive, a full-year profit would be next to impossible.
I’ll be more focused on revenue, which took a big jump in the third quarter in 2018 thanks to greatly increased deliveries of Tesla’s Model 3 sedan. If Tesla can cross the $US7 billion barrier, given its sales goals for 2019, it’s not out of the question for a $US10 billion quarter to materialise before the end of the year.
Playing defence with a ‘keep it simple’ analysis
My “keep-it-simple” analysis here is, to be perfectly honest, something of a defensive manoeuvre. Tesla has already telegraphed some pressure on profits in 2019, and shares are already pricing in weaker results on the bottom line. They fell below $US300 a few weeks ago when Musk raised profits warnings and the company announced layoffs. For January, the stock slid more than 12%.
That would mean trouble for a tranche of Tesla convertible bonds – $US920 million worth – due March 1. The conversion price is about $US360, and Bloomberg reported that Tesla has said it will satisfy bondholders with a mix of cash and equity. Obviously, more cash could be in the picture if first-quarter earnings don’t send the stock closer to that $US360 mark.
So, there will surely be some discussion about whether Tesla intends to raise capital in 2019, either through equity or by issuing new debt. Then the question will turn to Tesla’s balance sheet, where the company had $US3 billion in cash at the close of the third quarter in 2018 (that’s three times what Tesla has historically tended to finish a year with, by the way).
This is where matters actually get complicated.
Yes, Tesla can sell new shares. At prices below $US300, investors will certainly want to buy them. I don’t know why the company hasn’t done this already.
And yes, Tesla can issue new debt. Its 2017 junk-bond sale was accomplished on more favourable terms than most high-yield borrowers could dream of – and brought in $US1.8 billion. I’m also not sure why the company hasn’t done this. Car companies have insatiable appetites for capital and issue debt all the time. It becomes a problem only if sales absolutely tank.
Finally, Tesla can always put out some auto-lease-backed securities, as it has in the past, and take in additional deposits for new vehicles, such as the Model Y compact SUV that’s likely to be unveiled this spring.
Getting enough money to run the business is a problem, but it’s a good problem. For Tesla, the alternative is having a failing business that isn’t worth running. That’s a bad problem, but not one with which Musk and company are contending.
As you can see, once we pass over what should be an encouraging, if less spectacular fourth-quarter earnings reports, we can move on to the more substantive challenges of execution in 2019. Tesla didn’t do such a great job on that in 2018. The coming year needs to be better.