Categories Analysis, Earnings, Industrials

After Q1 surprise, Tesla (TSLA) lays out roadmap to navigate virus-infected market

Surprising everyone, Tesla Inc. (NASDAQ: TSLA) made an impressive start to 2020, reporting profit for the third consecutive quarter. The electric car maker owes the positive results mainly to regulatory credits and its growing presence in China, where industrial activity is recovering fast from the pandemic-induced disruptions.

Check Tesla’s Q1 2020 Earnings Infograph

The Silicon Valley car-maker turned to profit in the March-quarter, contrary to expectations for a loss. The rebound is viewed as an indication of permanent recovery from the losing streak. Interestingly, first quarter is typically a weak period for the company.

Liquidity

Encouragingly, the company solidified the cash position and ended the quarter with cash balance of more than $8 billion, which puts it in a comfortable position to dealing with the ongoing crisis. The market was also impressed by the commencement of deliveries of Model Y, Tesla’s ambitious electric compact crossover, much ahead of schedule despite the unfavorable conditions. It needs to be noted that operations were mostly unaffected until the final weeks of the quarter, before the epidemic-linked shutdown came into effect.

Lockdown Woes

Tesla’s CEO Elon Musk, who earlier expressed displeasure over the way the lockdown is being implemented, reiterated his view at the conference call and cautioned of a slowdown in the company’s financial performance if the restrictions continued.

Musk’s interaction with analysts was marked by the usual offbeat statements that one would expect from the flamboyant entrepreneur.  His take on the shutdown was this: “People — the outrage — systems outrage. So — but it will cause great harm, not just to Tesla, but to many companies. And while Tesla will weather the storm, there are many small companies that will not. And all people’s — everything people have worked for their whole life is going to get — is being destroyed in real time.”

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He also provided updates on the traffic light control feature being incorporated in Tesla vehicles, which feeds information into the Neural Net that controls the autopilot system and makes navigation easier as it accumulates data over a period of time.

“Soon, we will be collecting data from over 1 billion intersections per month. All of those confirmations are training on neural net, essentially, the driver when driving and taking action is effectively labeling — the labeling reality as they drive, and making the neural net better and better. I think this is an advantage that no one else has, and we’re quite literally orders of magnitude more than everyone else combined.”

Elon Musk, CEO of Tesla

Encouraged by the solid volume growth, the management is doing preparations to resume production in key markets including Europe and China, where the production ramp of Model 3 is progressing surprisingly fast. If everything goes well, the company will be manufacturing Model Y both in Fremont and China in a full-fledged manner soon, as well as in Berlin where the plant is getting ready. It also sees competitive advantage in the strategy to sell the Made-in-China models at lower prices.

Rough Road Ahead

But the market turmoil should create a roadblock for Tesla in the current quarter and beyond. Also, it seems nothing much has been done to tackle the production inefficiencies. Though Musk sounded pretty confident about the solar roof business, that segment will likely remain a drag on overall performance in the near future. While announcing the next Gigafactory in the US for manufacturing Cybertruck, Musk did not set any specific target for Tesla’s robotaxi project.

Surprise Profit

In the first three months of the year, the company swung to adjusted profit of $1.24 per share from a loss last year, continuing the recent trend, while market watchers were looking for a loss. Driving the bottom-line, revenues grew by a third to about $6 billion. It was the best first quarter for the company, in terms of production and delivery.

Stock Rallies

The unusually strong recovery of Tesla’s shares, after falling to a four-month low in March amid the market selloff, got a further boost from the positive first-quarter results. The stock, which opened Thursday’s session at $855.19, is moving closer to the record highs seen early this year. The company’s market value more than tripled in the past twelve months and nearly doubled since the beginning of the year.

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