Since Tesla’s share price touched the $170s last summer, the company’s stock has nearly quadrupled to above $750 at pixel time, catapulting its valuation to $130bn and making it the second most valuable automaker in the world behind $194bn Japanese giant Toyota.
Its valuation is a vindication for those YouTube commentators, institutional investors and clean energy enthusiasts who believe that the electric car company is on track to dominate in the new-world market of vehicles that silently glide down our streets. The $750-plus price tag is also a slap in the face of those — from the bleeding short-sellers to Street analysts to this very blog — who have been sceptical of Saint Elon of Musk and his company.
So what’s changed since fears last year the company might be heading for a brick wall?
Judging by its fourth-quarter results, quite a lot. Since posting a free cash flow burn on $944m in 2019’s first quarter, the company has recorded three successive periods of cash generation — the latest figure an impressive $976m. Cash flow improved so much so that, despite that dreadful first quarter, free cash flow for the year came in to $973m.
Margins have also improved, with Tesla’s 2019 ebitda margin rising 1.5 percentage points year-on-year to 9.1 per cent, and even on a net income basis, Tesla has been posting GAAP profits. Although the margins themselves are not much to write home about, at just 2.3 per cent and 1.4 per cent for the last two quarters respectively.
Despite these positives, top-line growth from its automotive segment also came to standstill year-on-year, as lower asking prices counterbalanced its record deliveries of 367,656 cars.
Turning to the balance sheet, and Tesla has developed a sizeable cash buffer of $6.3bn, up from $3.7bn at the end of 2018. In part thanks to its improved cash generation, and in part thanks to the $2.3bn it raised in May last year. With a net debt to trailing twelve months ebitda ratio of 3.3 times, down from as high as 17.2 in 2018’s third quarter, it’s fair to say worries over the company’s liquidity have dissipated for the time being.
Yet while Tesla’s operational improvements are worthy of the praise its been garnering from some corners of the media, let’s take a look to see whether they justify the company’s explosive price action over the past nine months.
Let’s start with 2019’s free cash flow figure of $973m, which we define as operating cash flow minus both capital expenditure and the net cost for solar energy systems.
The first point is that stock-based compensation, a non-cash cost for a corporate but not a shareholder, came to $898m for the year, or 92 per cent of free cash flow. Of that $898m, just under a tenth of the cost came from Musk’s ludicrous-mode pay packet, revealed chief financial officer Zach Kirkhorn on the conference call. Ex-stock based compensation, free cash flow would have been just $75m.
Second, Tesla has turned the taps on its capital expenditure off. In the first quarter, the company said:
Our 2019 capex, the vast majority of which will be to grow our capacity and develop new vehicles, is expected to be about $2.0 to $2.5 billion.
In the end, 2019’s capex came to just $1.3bn — a $1bn saving which is roughly equivalent to its total free cash flow.
Kirkhorn acknowledged on the call that Tesla has got better at spending cash, not that impressive a feat given the “alien dreadnought” production system ended up with Model 3s being made in a giant tent. But spending $1bn less than expected nine months ago is more than just counting the cents.
Indeed, when you compare Tesla’s capital expenditure as per cent of sales versus its larger rivals, you realise just how tight its budgeting has got:
If Tesla had no new models, or factories, on the horizon this may be more understandable. But this year the Model Y is due to go into production, with the Cybertruck, Roadster and Semi-truck all set to follow in the not too distant future:
Which is hard to square with diminutive capital expenditure and therefore a property, plant and equipment balance that’s down 8 per cent year-on-year:
A further few notes.
Tesla’s receivable balance — the money owed to it from customers — remains a question mark. Despite year-on-year revenues for the fourth quarter growing just 2 per cent, from $7.2bn to $7.4bn, its accounts receivable was up 39.5 per cent to $1.3bn. As FT Alphaville noted in December, for a company that collects its money from customers upon delivery, the balance is pretty high. Apples-to-apples comparisons of this metric with its rivals, as Tesla likes to make, are particularly tricky given that, unlike its competitors, the company runs its own dealership network.
The other balance sheet items which has our scratching our heads is Tesla’s inventory balance. Even though deliveries exceeded production by 7,204 units, inventory remained flat at $3.5bn. Although this may be interpreted either as bullish — the company is stocking up on raw materials ahead of future demand — or bearish — it can’t shift some of the higher-priced vehicles it produced during the quarter. The inventory breakdown will be in the 10-K, so we’ll find out then (whenever it arrives, Tesla not liking to follow common practice here by releasing it the day after earnings).
To focus on this quarter’s financials might feel a little asinine to the wildly optimistic bulls, some of whom believe a fleet of high-yielding self-driving autonomous taxis is just a few years away (barring regulatory approval). So where do analysts estimate Tesla’s numbers will be in 2024?
In four years, the Street reckons Tesla will bring in $66.4bn of revenues, $10.7bn of ebitda (16.1 per cent margin) and earnings per share of $24.15 — for a five-year forward price-to-earnings ratio of 30 times. For comparison, midlife crisis specialist Ferrari currently runs ebitda margins of 28 per cent, and trades at 40 times earnings today. And, crucially, on non-mass market sales of just $4bn.
Ferrari, of course, has made no promises of a 500-mile range battery, self-driving cars, or a rocket enabled electric supercar so perhaps its discount to Tesla’s valuation is justified in an era of rapid technological change. The market is beginning to think so. You might be surprised to hear that we’re not so sure.