Tesla's (TSLA -1.28%) earnings calls have fallen into a familiar pattern: Its leader Elon Musk explains why his company keeps missing its Model 3 production targets and why it's going to start hitting them in the next quarter. Investors are hoping Tesla's first-quarter report, due out May 3, will break that routine.
For the period, analysts are expecting Tesla to report a loss of $3.54 per share, significantly worse than the $1.33 loss per share in the same period last year. The last time Tesla reported an adjusted profit was the 2016 third quarter, when it posted earnings of 71 cents per share.
Tesla's stock is down about 6% in the past year as it struggles to ramp up production on its prized Model 3. But despite that drop, its market cap is about $49 billion, which is higher than Ford's (NYSE: F) nearly $44 billion market cap.
Tesla seems to have a lot of fans and a lot of naysayers. But whether you're a Tesla bull or a bear, here are the two things to look for in Tesla's earnings report:
Tesla has missed every production target for the Model 3. Image source: Tesla.
1. How fast is Tesla making the Model 3?
The Model 3 has caused much drama for the company over the past year. Expectations have always been high for the vehicle, which is meant to bring electric cars to the masses with its $35,000 price tag. However, the company can't seem to hit a Model 3 production target to save its life.
During last year's Model 3 delivery event, Musk promised that Tesla would be making 10,000 Model 3 vehicles per week by the end of 2018, and he implied that this would be an easy target to hit. Things are looking less certain now from an outsider's perspective, but Musk is maintaining that target.
The company is aiming for a weekly production rate of 2,500 vehicles by the end of March, so investors will be eager to hear on Wednesday if that actually happened this past quarter. By the end of the second quarter, Tesla hopes to be making 5,000 vehicles per week. But even if it does manage to hit that, it's still significantly behind initial targets to produce 5,000 vehicles per week by the end of 2017. So, hitting 2,500 vehicles per week when the company should be well past 5,000 is hardly something to applaud.
As Tesla struggles to live up to its promised targets, it has some other looming problems. The company is facing multiple abuse allegations from factory workers, including instances of racial harassment and gender discrimination. In addition, the United Auto Workers (UAW) filed a complaint against Tesla alleging that the company retaliated against workers that were involved in unionizing efforts by disciplining or firing them. Tesla fired about 400 employees in October.
Also, the California Division of Occupational Safety and Health said on April 18 that it was investigating the working conditions at the Fremont factory, where the Model 3s are built. This is a result of allegations that Tesla is under-reporting injuries and illness at the site.
Musk himself recently admitted that they were in the midst of "production hell" in order to get Model 3s to all the people that made reservations. And production was even halted for four to five days in April to tweak automation equipment to help speed up manufacturing.
The bottom line is that Tesla was supposed to be producing thousands of Model 3s per week to help fund other projects like its battery-making Gigafactory. But rather than waiting, Tesla started numerous other projects before the Model 3 production line even hit 2,500 vehicles per week. And now Tesla's financial situation is stretched thin.
2. Will Tesla need to raise more capital in 2018?
Tesla's capital situation is on thin ice. Musk has been adamant that Tesla won't need to raise more capital this year because it will be profitable and cash flow positive in the second half of 2018. But based on Tesla's history of hitting its targets, many investors have their doubts about Musk's profitability timeline.
The Economist used to be boring, but smart with a wicked dry wit. Now it's just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money.
— Elon Musk (@elonmusk) April 13, 2018
The company's ambitious projects have racked up about $10 billion in long-term debt, up from $6 billion in the prior year, as well as $23 billion in total liabilities, according to its last earnings report. In terms of cash and cash equivalents, the company reported $3.4 billion.
It's hard to believe that Tesla will end 2018 in a better financial position than in 2017, especially without raising more capital. Tesla has even said that it expects its capital expenditures to be slightly greater in the 2018 financial year than in 2017 as it ramps up production at its Nevada Gigafactory and the Fremont plant.
However, it's not impossible for Tesla to make a turnaround this year if it can actually hit its production targets. And last quarter, Tesla reported negative free cash flow of $276.7 million, which is still a significant improvement from the $969.8 million negative free cash flow from the same period in the year prior.
If Tesla wants to make money, it needs to stop overpromising and under-delivering on its production targets. The Model 3 has the potential to fund Tesla's other ambitious initiatives, but not if the company can't make more than 2,000 vehicles per week. If it at least hit its 2,500 weekly production target for this past quarter, that will be an OK start to the 2018 financial year. But even then, it's still way behind its initial projections and has a long way to go before hitting 10,000 vehicles per week by the end of 2018.
