Tesla reported Dec-18 mixed results, beating revenue but missing earnings. Shares are down 4% after hours, reacting mostly to news of CFO Deepak Ahuja leaving the company. Bottom line: the company’s fundamentals are trending in the right direction, and the list of systemic risks continues to be pared down. Our takeaways:

• Model 3 gross margins were above 20% for the second consecutive quarter despite introducing a lower-priced variant and facing headwinds in China.
• While Musk’s commentary on the call was optimistic, based on aftermarket trading, investors are taking a wait-and-see approach. See more below.
• Free cash flow of $910M exceeded our expectations, and the company added $718M to their cash balance in the quarter. They now have $3.7B in cash, and can comfortably service the $920M note due in March.
• CFO Deepak Ahuja leaving Tesla will be viewed as a negative by investors, evidenced by the stock moving sharply lower upon the announcement. Senior departures are rarely a positive, but Deepak has stayed with the company through hard times and may be passing on the roll during a time of relative stability. Deepak will be replaced by Zack Kirkhorn who has been with the company for nearly a decade.
• The company’s primary focus for the next several years will be profitably producing more affordable variants of the Model 3 and eventually the Model Y. The company is still planning on introducing the $35k base model later this year.

Autonomy Is Critical to Tesla’s Mission

Perhaps the most misunderstood aspect of the Tesla story is the significance of autonomy. On the call, Elon compared their efforts in autonomy to their mission to accelerate sustainable energy – both are at the core of the company’s purpose. He mentioned its potential to save millions of lives and give people their time back. While it is well understood that Tesla is working on autonomy, it is nearly impossible to value. As a loose reference, Waymo has been valued by several investment banks at more than $100B. We believe, over the next several years, especially with the introduction of Hardware 3.0 (more to come from Loup), that Tesla’s autonomy efforts will positively impact its valuation as investors begin to see that they are doing more than just making the best electric vehicles.

Positives that Investors have a Hard Time Believing

The call was also flush with positive data points that investors aren’t buying, as evidenced by the after-hours stock movement. As usual, we tend to add a layer of conservatism to Elon’s claims and timelines.

• Musk says, even in a recession, he expects deliveries would be up 50% in 2019. The Street is expecting 64% growth, which assumes stable macro conditions. Musk also commented that he believes Model 3 demand in a strong economy is 700k-800k vehicles per year. Tesla delivered 245k vehicles in 2018.
• The company plans to reach weekly production of 10k vehicles later this year with the addition of the Gigafactory in Shanghai. Gigafactory construction is only just starting, but Musk is adamant that Model 3s will be rolling off the line by the end of the year due to radical simplification of the production line. Additionally, the company expects “the capital spend per unit of capacity for this factory to be less than half of that of our Model 3 line in Fremont,” which is a positive for free cash flow.
• This year, Tesla will start tooling factories for Model Y production, and the first cars will be produced next year. This implies the company will hold a preview event for the Model Y this year, and Musk mentioned the possibility of a Pickup unveiling this summer.

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