Cash flow, production ramp-up in focus as Tesla (TSLA) gets ready for Q1 report

For Tesla Inc. (NASDAQ: TSLA), 2020 will be a crucial year in terms of staying profitable and meeting the growth targets. Given the volatile market conditions, the electric car maker will have to effectively tackle the coronavirus-related slump to be able to repeat the success it achieved last year.

Check Tesla’s Q4 2019 Earnings Infographic

After a lot of speculation, Tesla last year ended a losing streak and recorded profit in the trailing two quarters, brightening the turnaround hopes. Nevertheless, market watchers remain skeptical and forecast a loss of $0.36 per share for the March-quarter, though it marks a significant improvement from last year’s $2.9 per share loss. The estimate for revenue is $5.9 billion – up 30% from last year but lower than the fourth-quarter number.

Bullish View

The Silicon Valley car maker will be publishing first-quarter results on Wednesday at 4:15 pm ET. The company is estimated to have leveraged its prowess in self-driving technology once again. It is also expected to maintain the positive cash flow trend seen in recent quarters, bringing relief to stakeholders who have been worried about the massive cash burn.

“We’re spending money as fast as we can spend money in sensible ways. And we will spend – well, a lot of money this year, for sure. It’s – the challenge comes in like finding efficient ways to actually deploy the capital, that’s the harder part then sort of deciding on a capex number, really.”

Tesla CEO Elon Musk at the fourth-quarter conference call

Stock Rally

Tesla’s stock outperformed the leading indexes consistently in the past several weeks, all along boosting investor sentiment. The market will be closely following the earnings event, looking for updates on the management’s strategy in the changed scenario. In general, analysts are cautious in their outlook, with the majority assigning the stock hold rating and predicting a dip in valuation this year.

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Tesla started delivery of the Model Y crossover in March, much ahead of the schedule. Model Y being an eagerly awaited product, CEO Elon Musk will likely face questions on production and delivery targets at the post-earnings conference call. There will be a great deal of interest in the performance of the Gigafactory in China, where the company started Model 3 production last quarter.

Headwinds

One of the challenges facing the company, in terms of profitability, is unfavorable pricing adjustments for the leading models. Margins will also come under pressure from higher costs related to the China production ramp and Model Y roll-out.

After delivering 1,12,095 vehicles in the final three months of fiscal 2019, the management set the goal of selling about 500,000 units this year, encouraged by the progress in the production ramp of Model Y and improving market share in China. Earnings moved up 7% annually to $2.14 per share in the fourth quarter as the core automotive segment registered a modest growth.

Guidance

The Covid-19 outbreak might discourage Tesla from issuing detailed guidance this time, given the temporary closure of the California plant due to the market turmoil. Though the company had announced plans to resume operations at the facility this month, it was postponed to next month due to the lockdown imposed by the authorities. For those reasons, the last production goal looks far-fetched.

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Tesla’s shares, one of the most shorted Wall Street stocks, had a blockbuster year in 2019, with market value expanding steadily and hitting new records regularly. The uptick continued this year and the stock crossed the $900-mark in February for the first time, before paring the gains in the market selloff caused by the Covid-19 crisis. Interestingly, it is back on the growth path and is currently hovering near the recent peak.