I don’t have to remind anyone that the vultures are surrounding Tesla (NASDAQ:TSLA) with hungry eyes. No other quarterly report this earnings season has been met with such anticipation, or, if you own TSLA stock, dread.
Now, I like to give people second chances and let bygones be bygones. Tesla CEO Elon Musk is eccentric, yes, but he’s not Papa John’s (NASDAQ:PZZA) founder John Schnatter. But the mere fact that other people have done worse things doesn’t excuse one’s own infractions or missteps. For Musk, he’s got to reel things in and control his emotions.
That’s a minimum. His biggest challenge is to address chronic issues at the company, namely, the cash burn. Countless financial articles have mentioned the ongoing and increasingly negative free cash flow (FCF) problem, and its implication toward TSLA stock. Arguably, Bloomberg covered the subject the best a few months back.
The crux of the argument is that Tesla is spending itself into oblivion. Almost all technology-based upstarts burn cash at some point to invest for the future. Invariably, many of these firms go through FCF laced in red ink for extended periods as a gamble on the next big thing.
In that regard, TSLA stock is no different from countless other tech firms. However, analysts argue that Tesla has stretched itself too thin. In this year’s first quarter report, management disclosed negative FCF of $4.4 billion over the trailing twelve months.
The Bloomberg article, “Tesla Doesn’t Burn Fuel, It Burns Cash” was kind enough to include a “cash-burn” tracker. Although I left the page running on my computer, it reminded me that Tesla evaporated over $461,000 during the time I took to read the article.
That was, of course, a theoretical exercise. In a few hours, it’s about to get real.
TSLA Stock Earnings Expectations
I don’t quite share bearish analysts’ doomsday prognostications. But in the intermediate term, the upcoming second-quarter 2018 earnings report is a do-or-die situation for TSLA stock. Forget the year-to-date performance; shares have gyrated all over the map recently.
Where it goes decisively for the rest of the year and beyond hinges on how Elon Musk behaves, and what he says.
Let’s get the basics squared away. For Q2, the Street’s consensus earnings per share target is a loss of $2.92. This is nearer the “lower” end of the estimate spectrum, which ranges from a loss of $3.44 to a loss $2.19. To add context, in the year-ago quarter, TSLA stock hit a per-share loss of $1.33, strongly exceeding expectations.
On the sales front, covering analysts peg the consensus forecast at $4.1 billion. Individual estimates ranged from $3.4 billion to $4.8 billion. The vast high-low spread reflects growing cynicism towards TSLA stock. In Q2 2017, Tesla delivered $2.8 billion.
But it’s not mitigating losses on paper that concern analysts. Rather, it’s the company’s future outlook. Recall that the Q1 report in May was technically an earnings beat. However, Musk’s bizarre behavior during the conference call hurt his and Tesla’s reputation.
The good news is, Musk’s first challenge for Q2 is an easy one: Answer inquiries earnestly and professionally, even the ones that are “not cool.”
The second part of the equation is a tricky matter, to put it mildly. Musk has to convincingly address the cash burn and how he intends to boost the maligned Model 3 production figures. Of course, the Model 3 is central to eliminating negative FCF, but it’s also a seemingly unattainable goal.
Tesla previously promised a 5,000 unit production rate. However, the tech firm has consistently fallen well short of its own expectations.
Dump TSLA Stock? Not So Fast!
If you’re extensively vested in TSLA stock and want to trim your risk exposure, I can’t fault that logic. Or if you got in early and simply want to take some profits off the table, please do so. I lack Musk’s bravado, so I can’t and won’t promise a smooth ride.
While I won’t dissuade from the legitimate bearish arguments, I also think you can find positives between the lines. Yes, the cash burn is worrisome, but look at the bigger picture. Tesla revolutionized the automotive industry: General Motors (NYSE:GM), Ford (NYSE:F) and Toyota (NYSE:TM) are in many ways following Tesla, not the other way around.
Cash burn isn’t really the appropriate term here because it implies reckless waste. Exuberant investing is more like it, but that doesn’t have a catchy ring.
Furthermore, bears blast Tesla for failing to meet Model 3 production figures, but let’s not forget that the company achieved the most important and difficult goal: generating so much demand that Tesla had no choice but to disappoint customers.
I can’t stress this enough: Nobody wants to buy cars like they used to. But Tesla generates the kind of long lines associated with Apple (NASDAQ:AAPL) iPhone launches. That is unheard of in this generation, or in prior ones.
Bottom line, I wouldn’t give up completely on TSLA stock. Yes, the hate is real, but so are the underlying positives. In the long run, what made Tesla the giant that it is today will win out.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.