Impressions from 4Q ER and CC
Jason Wheeler's
moving away from term "Free Cash Flow" and moving towards "Cash Flow from Core Operations" and "Net Cash Flow".
Translation: Wheeler doesn't like using "Free Cash Flow" as a measure of success because it constrains CapEx. By using Net Cash Flow, and predicting it will be positive, Tesla execs wish to confirm that the bank account will be growing, but they don't want to rule out an equity raise if additional facilities are needed to meet incredible Model 3 demand. Net Cash Flow Positive will yield more money in the bank, which should calm investors. Why should a decision to grow through an equity raise at some point for expansion of manufacturing capabilities be considered detrimental, as long as the money in the bank keeps growing?
As for the term "Cash Flow from Core Operations", this is an important indicator of success for Tesla that has been overlooked previously. The main advantage of introducing it for 4th quarter is that by this metric, Tesla has turned an important corner (see chart)
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The previous Free Cash Flow chart showed Tesla falling deeper and deeper into the red with each passing quarter, largely because of increased CapEx. The Cash Flow from Operations shows Tesla improving quarter-over-quarter and going positive in 4th quarter, which is just the kind of graph you wish to show investors in 4th quarter.
Non-GAAP profitability in 2016 and GAP profitability in Q4 of 2016 are predicted.
Model X issues preventing further ramp-up, address by Elon Musk: "Yeah, we really don't see any fundamental issues."
Translation: We really don't see any fundamental issues.
Elon and JB spoke of the windshield sourcing, the door and door seal issues, and we learned about the now corrected supply issue with the chrome finish around the front windshield's brightwork. Elon indicated no show stoppers at this point. We learned of a production pause in January for quality reasons, and Elon indicated the ability for peak production of 1,000 Model X vehicles/week by mid to late 2nd quarter but with an average production of more like 700 to 800 Model Xs.
Re: Andrea James question about
timetables for migrating Model S to Body in White Line 2 and Elon's decision to not provide details
Translation: The original plan was to sometime in 2016 move Model S to share body in white line 2 with Model X and thereby free up space for the future Model 3 production line. I suspect Elon doesn't want to abandon using BIW Line 1 for Model S production until BIW Line 2 demonstrates that it can produce a high enough mixed batching of Models S and X to satisfy the 80,000-90,000 vehicle delivery goal of 2016. If the abandonment of BIW Line 1 happens later in the year than forecasted, then analysts become concerned about how this delay will affect Model 3 production preparations. Tesla has nothing to gain by making a prediction here and then not meeting it. Best to avoid speculation.
Overall impressions: If Tesla can live up to delivery guidance and make a non-GAAP profit in 2016, plus prove to be Net Cash Flow Positive in 2016, then investors will be reassured and we will see TSLA appreciate substantially. The real question is how quickly Model X can be ramped up. The trajectory of TSLA stock in 2016 depends upon a successful Model X ramp. The demand for Model X in 2016 is already there and for Model S should be there, so, once again, production, not demand, is key to the year's results.
The one exception regarding demand is Model 3. Since there will be no 2016 production of Model 3, that car is all about demand. If deposits can grow to over 100,000 in a short time (and this should be quite possible given the order backlog for Model X at a substantially higher price point, then Tesla might be inclined to do an equity raise later in the year for the purpose of building a Chinese or European factory. For this reason, it is important to move away from the Free Cash Flow metric of performance of move toward Net Cash Flow and Cash Flow from Operations to judge cash performance by. Tesla's setting the deposit amount at $1,000 is clearly an effort to maximize the number of deposits and show the world the level of demand for Model 3. As long as Model 3 is reasonably attractive to look at, I think they'll exceed this number. High deposit numbers for Model 3 will boost TSLA price and simultaneously give TSLA reason to look at an equity raise, even though it says that this is not needed (and it isn't needed, but it could be a good thing if Model 3 is being reserved in amazing numbers).
