Tesla reported third-quarter net income of $787 million, or 22 cents a share, on 21 October, down 44% from a year earlier on revenue that was essentially flat at about $28 billion. Excluding certain items, earnings were 48 cents a share, 3 cents better than analysts expected, and the company generated $1.5 billion in free cash flow when analysts had expected it to burn cash, according to the Associated Press. Tesla’s stock rose 3.6% during the regular session and then fell 3.2% after hours. The question is whether the quarter shows a company getting its costs under control or one whose earnings are still shrinking.
The case for a healthier Tesla rests on cash and margins. Free cash flow of $1.5 billion was a surprise, and analyst Seth Goldstein called Tesla’s cash generation the quarter’s big surprise, saying the company “is taking a more capital-efficient approach, delaying longer-term projects.” Profit per dollar of car sales was 18.1 cents, up almost 3 cents from a year earlier, and deliveries of nearly 490,000 vehicles were higher than in the prior three months. The margin figure measures profit per dollar of car sales, while net income covers the whole company, so the two can move in opposite directions in the same quarter. Tesla also said 75% of the vehicles it sold in North America included a subscription to Full Self-Driving (Supervised). Capital spending doubled to $4.7 billion, but that was less of an increase than analysts had expected, and the full-year estimate was cut from $25 billion to $20 billion.
The case for concern rests on earnings and revenue. Net income of $787 million is 44% lower than a year earlier and revenue of about $28 billion was flat and slightly below forecasts. The cut to the capital-spending forecast also means that longer-term projects are being delayed, which Goldstein described as a more cautious approach. According to FactSet, Tesla trades at 170 times expected earnings over the next year, against 19 times for the S&P 500, and Tesla faces several safety investigations into its driver-assistance software. The stock’s after-hours fall of 3.2% followed a 3.6% gain in the regular session, so the market’s first reaction was to take back the day’s gain. Shares in technology companies were also under pressure that week, with the Nasdaq falling 2.6% on Thursday.
The results matter because Tesla is now also the subject of a possible merger with SpaceX. Elon Musk said on a SpaceX earnings call that special committees have been set up at each company to discuss a possible combination, and cautioned that “many hurdles remain.” He declined to discuss the merger further on Tesla’s own conference call. A deal would be judged partly on Tesla’s cash generation and capital spending, so the third-quarter numbers give both sides a baseline. Tesla’s shares rose 3.5% on the day the merger talk emerged, and SpaceX’s rose 8%.
Tesla’s quarter was weak on profit and revenue but stronger on cash than expected. The next test is whether that discipline continues when spending rises again.