Tesla exceeds all expectations

Elon Musk could have used Tesla third-quarter earnings to showboat. After months of commotion the electric carmaker produced an unexpected set of profitable results that exceeded all expectations. Shares rose 13% in after-hours trading.

Yet the call with investors was so scripted and subdued that Tesla sounded like any other car company. Perhaps Musk’s settlement with regulators following an illfated attempt to take Tesla private is responsible.

Hours earlier, Consumer Reports magazine put Tesla near the bottom of its reliability index, citing problems with suspension and door handles just the sort of criticism that would usually get Musk’s blood boiling.

Yet all the CEO wanted to focus on was vehicle safety, careful spending and capital efficiency, which has shored up cash reserves to almost $3bn. The figures do a good job of backing Musk’s claim that Tesla will not raise equity or debt in the near term. Higher margins on Model 3 vehicles helped generate $880m in free cash flow.

If the next quarter throws off as much cash, it will be able to meet upcoming debt payments and keep a cash buffer of about $2bn without going cap in hand to markets. That is just as well. Shares remain below the $360 target price that would convert $920m of bonds into equity early in 2019. The notes will have to be repaid.

Tesla customers seem happy. The gross margin above 20% on Model 3s is partly down to customers upgrading to more expensive versions. Phasing out the US federal tax incentive could put the brakes on this demand. But Tesla has its eye on customers in Asia and Europe to make up for it. Given this expansion, plans for a factory in China and the launch of Model Y, Musk would be wise to lay off predictions of profitability for every quarter and shun the need for funding. Near-term solvency fears have been quelled. But it takes more than one profitable quarter to declare self sufficiency. /London, October 24