Tesla’s New Pickup Could be a Much-Welcome Revenue Growth Trigger

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When Tesla (NASDAQ:TSLA) reported third quarter 2019 results, TSLA stock moved higher even as revenue declined on a year-on-year basis. The upside was triggered by record vehicle production and delivery. Since more Model 3 vehicles were sold, the average selling price declined. However, TSLA reported yet another quarter of positive operating cash flows.

Tesla's New Pickup Could be a Much-Welcome Revenue Growth Trigger
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I believe that the decline in the company’s top-line could reverse in 2020 and 2021. This could then take Tesla stock higher from current levels, leading me to maintain a “positive” outlook on the stock. One of the key reasons for this view is the anticipated launch of the company’s pickup truck.

Bullish on the Cybertruck

The company’s cybertruck will be unveiled on Nov. 21, 2019 and could be game changing in terms of volume growth. If we look back at Tesla’s trailing 12-month vehicle deliveries, those remained below 100,000 until Q3 2017. The launch of Model 3 more than tripled in deliveries within two years. For Q3 2019, the TTM vehicle deliveries were close to 350,000 units.

A similar volume bump-up is likely after the launch of the pickup trucks. Two factors lead me to this view. One, Elon Musk believes that the pickup truck will be Tesla’s “best product ever.” This indicates strong conviction on the model design and potential performance. And, two, pickup sales in the U.S. are booming. Ford (NYSE:F) reported Q3 2019 sales of 240,387 pickups. This implies annualized sales of nearly 1 million units. Musk is talking about pickups that will be attractively priced with a 400-500-mile range. Considering the addressable market, volume growth can be robust.

And that addressable market? Consider that 9.9 million units of pickup and SUVs have been sold in the U.S. year-to-date, which implies annual sales of approximately 13.3 million units.

If Tesla’s cybertruck can impress the markets, even a 10% market share would imply sales of 1.3 million units. Therefore, the pickup does have the potential to boost volumes.

No Equity Dilution Likely for Europe Gigafactory

Tesla has chosen Berlin for gigafactory four. According to reports, the factory outside the German capital is likely to cost $4.4 billion and will be completed by the end of 2021.

I don’t expect Tesla will require external financing in the form of leveraging or equity dilution. For the quarter ended September 2019, Tesla reported cash & equivalents of $5.3 billion. In addition, TSLA has reported positive free cash flow for the last three quarters.

Therefore, the cash buffer should ideally increase and it makes Tesla self sufficient in terms of funding growth. Increase in cash flows is also positive from a valuation perspective. TSLA stock moved higher in Q3 2019 even with decline in revenue. A key reason was positive cash flows.

Tesla did mention in its report for the period that “we continue to believe our business has grown to the point of being self-funding.” This seems very likely.

In relation to the gigafactory in China and Europe, Tesla will be able to cut cost-per-car over time. With economies of scale, this will boost the company’s EBITDA margin and cash flows.

Final Words on TSLA Stock

TSLA stock has been trending higher post third quarter results and I believe that the positive trend will sustain. With the company pricing Model 3s on par with gasoline-powered mid-sized sedans, Tesla expects to gain market share in China in the coming quarters. It is worth noting that China is the largest market for mid-size premium sedans.

Further, Model Y is also scheduled for launch in summer 2020. The first look of cybertruck this week, along with information on its features, will also add to the positive momentum. I believe that the pickup market will be a game changer for Tesla in the next 24-36 months.

Overall, there are several reasons to be bullish on Tesla stock and the company is well positioned for value creation as cash flow grows.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/teslas-new-pickup-could-be-a-much-welcome-revenue-growth-trigger/.

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