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Tesla’s Q1 Earnings Slow Down, the Share Drop is Lower Than Expected

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Following the bell on Wednesday, it is anticipated that the car vehicles company Tesla might incur a loss in its 1st quarter. But the investors are more concerned about its Model 3 progress, cash burn rate, and margins. The Tesla shares rose due to a less than expected loss on Wednesday as the electric car maker made more revenue in its Model 3 production in April. Tesla burnt cash faster than in the previous quarter to achieve the production targets; its burn rate was slower than the analysts’ expectation. But Tesla’s financial needs in the future remain open-ended.

As per Wall Street, the figures stand as Tesla’s first-quarter loss of $3.58 per share and revenue of $3.22 billion. Back in April, Tesla announced that it had failed to meet its Q1 production and delivery targets for its Model 3, which was an electric sedan priced at a floor price of $35,000. The last week of its Q1 could only manage to produce 2,020 Model 3s, which fell short of its production target of rolling out 2,500 Model 3 sedans by the end of March on a weekly basis.

However, Tesla plans to tie its loose ends by planning to increase the Model 3 production rate to 6,000 cars per week by the end of June. And as per a leaked email of Elon Musk to his employee, this high production objective is to be propelled by Tesla’s Fremont, California, factory, which will be run round the clock to hit the production target spot on around the clock, according to the email that Elon Musk sent to employees. To this end, increasing the number of shifts and employees and overtime costs have to be borne by the company simultaneously while it is set to introduce fresh car models such as a new Roadster, Model Y, and an all-electric semi truck.

Nevertheless, Musk tweeted back in mid-April that he expected that Tesla would eventually strike its long-awaited golden run in the second half of 2018, with positive cash flows ensuring a profitable quarter. Given that after it went public in 2010, Tesla has seen only 2 profitable quarters, this positive prediction by Musk is the need of the hour for the reputed company. Tesla has often missed production deadlines and targets and needs one good profitable quarter to turn things around and be back on track.

On this front, one of the key factors for investors is cash flow. Back in 2017, Tesla’s final cash flow was around $3.5 billion. CFRA analyst Efraim Levy stated that he expects cash outflows of about $4.5 billion through 2019, with estimated negative cash flows of $3.35 billion and an additional $1.15 billion in debt due to be cleared early next year. Furthermore, he added that Tesla would have to raise finance of about $2 billion-$3 billion again by March 19, 2019, when the last tranche of debt would have to be cleared.

Due to change in Tesla’s accounting, its year-over-year and quarterly numbers such as automotive revenues and gross profit margins won’t be compared directly, so the company will have to record some lease transactions as sales in its ledger, including all the revenue, income and costs for every single lease simultaneously, and not in terms of monthly increments spread over the total term of the lease.

Gordon Johnson, the Vertical Group analyst on CNBC’s Halftime Report, was quoted saying on Wednesday: “Now they are basically listing more of their leases as direct auto sales, and if you look at the difference between the margins of the leases and the automotive sales, in 2017, lease margins were 36 percent and automotive sales margins were 21 percent. So we think there is going to be a hit on the automotive margin line.”

Following its Q4 earnings information update, many executives have quit the company, such as Tesla’s Autopilot leader Jim Keller, its Chief Accounting Officer Eric Branderiz, but Tesla is sure to bounce back, and soon.

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