Tesla shares dip on Q3 report – it is a bulls vs bears fight

Following its Q3 report, Tesla shares witnessed sharp selloff. The Bulls are optimistic that this is just a passing cloud and Tesla will deliver on its promises wiping out significant losses to claw back into the healthy territory.

The rise and fall in Tesla shares is nothing new and has been happening at regular intervals over the years though the scale tilts in favour of the bulls on a long-term view.

The shareholder letter for Q3 from Tesla and the earnings call with a specific focus on commentary from Elon Musk and other executives on Tesla’s ambitious production ramp of Model 3 gave an upper hand for the bears, albeit, temporarily. But, Tesla also signaled strong consumer interest for its cheaper sedan and if the company can show that production woes being experienced now are behind, the pendulum can swing back.

Q3 revenue for Tesla was reported at $2.99 billion (annual addition of 30%) and EPS at -$2.92. Revenue was marginally higher than what the street expected but the negative EPS was enough for the bears to take charge and batter the scrip down with the street estimating the negative EPS at $2.35.  Free cash flow was also impacted by the significant investments in battery Gigafactory and Model 3 together accounting for $1.1 billion in capital expenditure.

Investors are not too bothered about the cash burn (largely expected) but missing the production target of 5000 cars per week of its Model 3 and pushing that target to “late Q1” fro end Q4 originally was worrisome. The company’s comments on achieving a production rate at 10,000 cars per day towards the final months of 2018 were also subdued.

Commenting on the earnings call Musk stated that the primary constraint for Model 3 was the battery module assembly comprising of 4 zones of which zones 3 and 4 were in the good state whereas zones 1 and 2 were not. He added further that a subcontractor who was responsible for the ‘zone two’ had turned in a poor job and the scope of that problem came to light only recently. Consequently, all the software had to be rewritten from scratch apart from redoing electrical and mechanical elements of zone 2. He also qualified these statements saying a lot of work was still left for Tesla.