Will Tesla survive this crisis?
During these special circumstances the world is facing, last week, a lot of companies released their Q1 update regarding their operations and financial situation. Tesla released its update last Thursday, with very good news, which will be useful to analyse how ready is Tesla to survive this crisis. This quarter was record-breaking in many relevant aspects, most people were surprised given the circumstances, especially the usual sceptics, which made the stock price rise around 10% during after hours. Last quarter, Q4 changed a lot of analysts opinions, the finance media rhetoric on Tesla flipped for the most part and big institutional investors have acquired Tesla’s stock, but there are still a lot of people who haven’t understood yet what is going on.
Highlights
This quarter was another profitable quarter for Tesla, which is impressive taking into account the COVID-19 situation and the fact that Q1 is usually the weakest quarter for the car industry. Available cash has increased by $1.8B, which means they currently have $8.1B in the bank to get through the coming recession. At the same time, Ford and GM borrowed $30B in credit, Ford reported $2B in losses and used part of the borrowed money to pay dividends and cancel their Lincoln EV, while GM delayed their Hummer EV.
The operating income was positive by $283M which is not huge, but what matters is the trend, five out of the last seven quarters have been profitable, as this one is the weakest quarter for the industry. For the last 8 years, people used to say that Tesla would never be profitable, but all these people didn’t understand the vision, long-term plan, the potential of economies of scale and optimization.
The Model Y started deliveries a year ahead of schedule, only ten months after the presentation, this is just another example of how the previous work is paying off and allowing the company to change and develop products at an incredible rate. They keep learning and applying that acquired knowledge, and example of this is that the Model Y is more profitable than Model 3 and has a longer range in spite of being bigger and heavier, an important driver for this would be the culture of innovation and optimization within the company.
Regarding demand, Tesla disclosed that it currently has record backlog, which is great news to weather this crisis, related to this, during the lockdown Tesla has been able to make contactless deliveries while other companies have to wait until their dealerships open.
Their automotive margins are over 25%, which is steadily increasing despite the investment and growth. Next year margins will get even close to 30% because of improvements thanks to economies of scale, declining battery cost, vertical integration and software revenue. With these margins, Tesla has two options, to increase profits or to reduce the price in order to accelerate the transition to sustainable transportation, as their mission statement reflects. They will probably make use of a combination of the two, but focusing on the second one.
Despite the international expansion building Gigafactory Berlin and the second phase of Gigafactory Shangai, the operating expenses have decreased 8% QoQ and 13% YoY, which reflects the efficient use of capital.
In terms of production capacity, the predictions for Gigafactory Shangai forecast the delivery of 400.000 cars per year, combining Model 3s and Model Ys, this will be achieved during 2021 when the expansion is finished. At the end of 2021, Tesla will probably be able to manufacture around 1.000.000 cars per year with the plants in US, Shangai and Europe.
Energy
Tesla is not only focused on transportation, it is, in fact, an energy company that happens to produce cars too. Their Megapack, a battery pack of up to 3 MWh, has currently more demand than production capacity, and even if they increase their capacity, this is a technology that has a lot of potential growth since it is a cheaper and more efficient way of stabilizing the grid than typical peaking power plants, which is something growing because of the introduction of more renewable energy into the grid.
Their Powerwalls are selling well, this quarter the 100.000th was sold and around 40% of residential solar costumers opt to buy one of them which means great cross-selling. Their Solar Roof business is growing, thanks to the cheaper and better version three tiles, they are currently producing enough for up to 1.000 homes a week, but this will improve overtime as the technology improves, price drops and demand increases.
Software
A key feature of the future of transportation is autonomous vehicles and Tesla is the leading company in this technology, one of the most important pieces to solving this puzzle is data, and Tesla has a huge lead, it has over 1.000.000 cars constantly recording data to improve its AI models, something that no other company has or will have in the near future. Recently they released an update that allows its cars to detect stop signs and traffic lights and stop accordingly, this is a relevant milestone because it allows it to drive in the city, which is the most difficult environment for an autonomous car.
There is a lot of deferred revenue in software that will start to materialise as functionality improves and more people decide to unlock features in their autonomous-ready cars, this will mean millions of almost pure profit for Tesla. Subscription services or upgrades unlocked by software for their cars will also contribute to this increase in profit in the near future.
Conclusion
The plan and mission of Tesla remain unchanged, they have proven everyone wrong over the years, and they are financially healthy while other car manufacturers are drowning in debt and other liabilities, with no clear plan to challenge Tesla in the future of transportation, with some exceptions like Volkswagen for example.
This year was going to be Tesla’s breakout year, which will probably be delayed until 2021 because of the pandemic, few non-believers will remain. Tesla has everything going for them, growing demand, record backlog, no competition, huge lead in software, AI, battery technologies and passionate following that no other car manufacturer has. So the answer to the question in the title is clear, in my opinion, unless something really unexpected happens, Tesla will probably come out of the crisis even stronger.