Telsa's Earnings: Grounding SpaceX Rocket Enthusiasm?

Summary

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WSJ Your Money Briefing

Episode Title: Tesla's Earnings: Grounding SpaceX Rocket Enthusiasm?
Air Date: February 9, 2018
Host: JR Whalen
Guest: Charlie Grant, Wall Street Journal “Heard on the Street” Columnist

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Episode Overview

This episode explores the paradox between the fanfare of Tesla and SpaceX's highly publicized rocket launch and the sobering financial realities revealed in Tesla’s latest earnings report. Host JR Whalen and guest Charlie Grant dissect Tesla’s quarterly results, cash flow situation, margin challenges, future prospects for the Model 3, and the company’s ongoing access to capital markets. The discussion is candid, providing context for both the optimism and skepticism surrounding Tesla’s future.

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Key Discussion Points and Insights

1. Tesla’s Latest Earnings: Mixed Signals

[00:33 – 01:42]

• Tesla reported a quarterly loss of $3.04 per share, which was better than analyst expectations of a $3.11 loss.
  • Charlie Grant: "Tesla reported a loss of $3.04 a share and that actually was better than what analysts had been expecting: $3.11. Normally that would be occasion for a stock to go up when you beat the estimate, but there was a bit of an asterisk there." [01:10]
• However, a year ago analysts expected only a 17 cent loss per share, suggesting the situation has deteriorated compared to earlier expectations.
  • Charlie Grant: "With Tesla's estimate a year ago, these same analysts were expecting a loss of just 17 cents a share. So it's not the good progress that you might have otherwise thought." [01:24]

2. Cash Burn: Improving, But Questions Remain

[01:42 – 02:10]

• Free cash outflow was $277 million, much improved from the previous two quarters, which were around $1 billion, but it’s unclear if this signifies a sustainable trend.
  • Charlie Grant: "Free cash outflow was $277 million and that's significant. But the last two quarters it was more like a billion dollars. We'll have to see if that's an improvement in the business or that just a few one time events were working in their favor." [01:51]

3. Margins Under Pressure

[02:10 – 03:05]

• As Tesla delivers more vehicles, particularly lower-priced ones, its automotive gross margin has dropped sharply—from 22–23% last year to just 13.8% now.
  • Charlie Grant: "Tesla set a record for deliveries in the fourth quarter and it was their worst automotive gross margin performance in quite some time. Just 13.8%. A year ago we were talking 22%, 23%." [02:21]
• Tesla is losing significant money selling premium vehicles; concerns loom about how margins will fare as they move into selling much cheaper Model 3s.
  • Charlie Grant: "If you can't generate a decent margin at a much higher price point, making it work with a cheaper car ... I'm scratching my head on how that exactly is going to happen." [02:50]

4. Model 3: The Double-Edged Sword

[03:05 – 04:07]

• The Model 3 is crucial for Tesla, positioned up to 65% below the price of the Model S and X, but the lower price amplifies margin challenges.
• Tesla faces growing competition from established luxury carmakers that have production scale and efficiency.
  • Charlie Grant: "Tesla is the leader in electric cars ... but the flip side of that is Tesla has serious competition from established luxury carmakers who are not going to have the trouble, the teething problems, of developing mass production systems and processes. Tesla is way behind on that." [03:35]

5. The Very Tough Auto Business

[04:07 – 04:35]

• Elon Musk’s achievement in breaking into the US automotive market is remarkable, given the immense barriers, but the fundamental difficulties of car manufacturing remain.
  • Charlie Grant: "You know what? There's a reason why we haven't had a new, significant American automaker in decades. It's hard." [04:28]

6. Access to Capital: The Current Lifeline

[04:35 – 05:21]

• Tesla’s ongoing losses are presently mitigated by “open access” to capital markets for equity and debt issuance.
  • Charlie Grant: "As long as they can raise equity and debt, which they haven't had any trouble doing, they can deal with the losses and keep going quarter after quarter. The trouble with that strategy is the capital markets can close quickly without warning." [04:49]
• Sudden market downturns could jeopardize this access and pose existential threats.
  • Charlie Grant: "If you're counting on a door being open three months from now and the door is closed, they might have a real problem." [05:16]

7. Elon Musk’s Unique Influence

[05:21 – 05:39]

• Elon Musk’s charisma and boldness help maintain investor confidence and open doors, at least for now.

  • JR Whalen: "A lot of companies would like to have an Elon Musk type character as their spokesperson ... So at least he's doing his best to keep those doors open." [05:21]
  • Charlie Grant: "Yeah. Knowing at least that rocket blasted off. It's not all negative there." [05:34]

• Memorable moment as Whalen references the rocket launch sending a Tesla Roadster into space with a playful, pop-culture nod:

  • JR Whalen: "My first thought was a Weekend at Bernie’s type scenario with that model of an astronaut or a model of a helmeted driver sitting in the convertible classic ..." [05:39]

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Notable Quotes

• Charlie Grant: "Tesla set a record for deliveries in the fourth quarter and it was their worst automotive gross margin performance in quite some time. Just 13.8%. A year ago we were talking 22%, 23%." [02:21]
• Charlie Grant: "If you can't generate a decent margin at a much higher price point, making it work with a cheaper car ... I'm scratching my head on how that exactly is going to happen." [02:50]
• Charlie Grant: "There's a reason why we haven't had a new, significant American automaker in decades. It's hard." [04:28]

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Timeline of Important Segments

| Timestamp | Segment Description | |-----------|--------------------------------------------------| | 00:33 | Introduction and earnings overview | | 01:10 | Losses compared with analyst expectations | | 01:42 | Cash burn and free cash outflow improvements | | 02:10 | Automotive gross margin decline | | 03:05 | Focus on Model 3 and competitive concerns | | 04:07 | Why the auto business is exceptionally tough | | 04:35 | Reliance on capital markets and associated risks | | 05:21 | Elon Musk’s role and open investor doors | | 05:39 | Humorous close referencing SpaceX launch |

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Conclusion

This episode sheds light on Tesla’s financial reality beneath the surface-level excitement of their widely celebrated rocket launch. While Tesla is still far from profitability—struggling with shrinking margins and ongoing cash burn—it remains afloat due to market enthusiasm and the relentless drive of Elon Musk. But as Charlie Grant warns, the company’s bet on continuous access to capital markets is precarious, especially given rapid market shifts and intensifying competition in the electric car sector.

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Transcript

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[JR Whalen]

This is yous Money Matters from the Wall Street Journal. Welcome to youo Money Matters. I'm JR Whalen in New York. Tesla is flying high these days after the successful SpaceX rocket launch which blasted a Tesla roadster into space. But a look at the automaker's fourth quarter numbers would indicate gravity is taking hold of the company's efforts to reach for the stars. Wall Street Journal heard on the street columnist Charlie Grant joins us to discuss. So Charlie, there was some good news and bad news in Tesla's earnings report. First, it just beat the consensus loss that had been issued by analysts.

[Charlie Grant]

That's right, yeah. Tesla reported a loss of $3.04 a share and that actually was better than what analysts had been expecting. $3.11. Normally that would be occasion for a stock to go up when you beat the estimate, but there was a bit of an asterisk there. With Tesla's estimate a year ago, these same analysts were expecting a loss of just 17 cents a share. So it's not the good progress that you might have otherwise thought.

[JR Whalen]

It sounds good.

[Charlie Grant]

Yeah. There's a little fine print attached then.

[JR Whalen]

Cash burn has been a big issue for the company, but at least in the latest quarter, as you point out in your story, the company and its CEO Elon Musk, they seem to have reined that in.

[Charlie Grant]

Yeah, yeah, no, this number was much better. Free cash outflow was $277 million and that's significant. But the last two quarters it was more like a billion dollars. We'll have to see if that's an improvement in the business or that just a few one time events were working in their favor.

[JR Whalen]

And like any business, margins are one of several lifelines to success. And the more cars Tesla sells, you say in your story, the worse its margins become. What did you mean by that?

[Charlie Grant]

Well, basically Tesla set a record for deliveries in the fourth quarter and it was their worst automotive gross margin performance in quite some time. Just 13.8%. A year ago we were talking 22%, 23%.

[JR Whalen]

Oh, so that's come down.

[Charlie Grant]

Yeah, so very significant change. And Tesla's of course, losing a lot of money while selling $100,000 cars. And the Model 3, which is the car that everyone's so excited about, it's supposed to be selling for much less than that. So if you can't generate a decent margin at a much higher price point, making it work with a cheaper car, I'm scratching my head on how that exactly is going to happen.

[JR Whalen]

We're going to talk about the Model 3 in just a moment. We're speaking with Hurt on the street columnist Charlie Grant, and you're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. So, Charlie, a lot of Tesla's success, both real and perceived, rests on the sales of its Model 3, which you could describe as a discount vehicle up to 65% lower than the cost of the more expensive Model S and X. Not only does that present margin issues, but there's a lot of competition on the horizon.

[Charlie Grant]

That's right. I mean, Tesla is the leader in electric cars, and I think the big auto makers that are more traditional players have gotten serious about electric cars because of Elon Musk, and that's to his credit. But the flip side of that is Tesla has serious competition from established luxury carmakers who are not going to have the trouble the teething problems of developing mass production systems and processes. Tesla is way behind on that.

[JR Whalen]

You make a good point about the teething process. They have had to chart through literally uncharted territory and putting these cars on the road with very, very expensive components. And that plays right into the cash flow issues.

[Charlie Grant]

Absolutely. Absolutely. The auto business is very tough. Elon Musk has gotten a lot farther than many observers thought possible, myself included. But you know what? There's a reason why we haven't had a new, significant American automaker in decades. It's hard.

[JR Whalen]

You're right that despite the struggles, Tesla still enjoys open access to capital markets. While cash flow is an ongoing concern, it may not be a fatal issue for the foreseeable future.

[Charlie Grant]

As long as they can raise equity and debt, which they haven't had any trouble doing, they can deal with the losses and keep going for a quarter, quarter after quarter. The trouble with that strategy is the capital markets can close quickly without warning. I don't think too many market observers predicted the trouble we saw in the stock market this week. That came out of nowhere. That's the drawback of this strategy. You never know what the future holds. If you're counting on a door being open three months from now and the door is closed, they might have a real problem.

[JR Whalen]

A lot of companies would like to have an Elon Musk type character as their spokesperson as the face of the company who can glad hand with investors and such. So at least he's doing his best to keep those doors open.

[Charlie Grant]

Yeah.

[Deel Advertiser]

Yeah.

[Charlie Grant]

Knowing at least that rocket blasted off. It's not all negative there.

[JR Whalen]

My first thought was a Weekend at Bernie's type scenario with that model of an astronaut or a model of a helmeted driver sitting in the convertible classic that's heard on the street. Columnist Charlie Grant joining us here in our studio. Charlie, thanks for being with us.

[Charlie Grant]

Thanks so much for having me.

[JR Whalen]

And thank you for listening to youo Money Matters. I'm JR Whalen in New York for the Wall Street Journal.

[Deel Advertiser]

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