Tesla results look good on paper, but rough road on horizon

At first glance it is hard not to be impressed with results released by Tesla Motors.

At first glance it is hard not to be impressed with results released by Tesla Motors.

The company blew past boss Elon Musk’s third-quarter profitability goal, reporting revenue of $US2.3bn and earnings per share of US14c. Both topped analyst expectations. Tesla also delivered a record number of cars in the third quarter and expects to meet its full-year target.

Tesla even reported positive free cash flow, defined as operating cash flow less capital spending, for the first time since 2013, to the tune of $US176m. Shares rose after hours, a sign that fortunes for beleaguered investors might be turning.

But a closer look suggests that Mr Musk will have his hands full delivering on his vision. Tesla attributed its positive operating cash flow to higher sales and “careful expense management”. Indeed, accounts payable and accrued liabilities rose by more than $US600m from June 30 to $US2.3bn. An increase in parables flatters cash flow under generally accepted accounting principles.

Furthermore, the sale of regulatory credits to other carmakers generated $US139m of high-margin revenue, but Tesla expects “negligible” sales in the fourth quarter. Total net income was just $US22m.

In the longer term, the key question for the stock remains whether Tesla can deliver its Model 3 sedan on time and on budget. The stock’s sky-high valuation leaves precious little room for a slip-up.

Tesla still says it will begin volume production of the car in the second half of 2017, but there are reasons to be sceptical. The company slashed its 2016 capital expenditures budget by more than $US400m. And Tesla has a long track record of missing its self-imposed production deadlines. Questions about the stock price’s sustainability won’t go away any time soon.