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Morningstar | Tesla's 1Q Plagued by Delivery Issues, but We Expect Improvement Throughout 2019. See Updated Analyst Note from 25 Apr 2019

We expect Tesla's first-quarter loss to be the low point for 2019, and we see no reason to change our fair value estimate. Adjusted diluted EPS of negative $2.90 badly missed consensus of negative $0.69. Revenue grew 33% year over year but fell 37% from the fourth quarter, missing consensus, due to Tesla's previously disclosed sequential delivery decline of 31%. We reiterate our April 4 note comments: For now we are giving Tesla the benefit of the doubt that the first-quarter deliveries were a function of problems introducing the Model 3 to Europe and China rather than a demand shortfall. We also said Tesla needs to adjust operations so it can produce to meet demand in all geographic markets at the same time; otherwise it will never scale, in our view. In the first quarter, Tesla produced in batches for geographic locales--what it calls the "wave" approach--so the U.S. got starved for Model 3s in the first half of the quarter so Europe and China could be supplied. With all product coming from California, the long shipping times caused half of first-quarter deliveries to occur in the last 10 days of March. The company is starting to unwind the wave now, but we think realistically it just needs more capacity, which is why having the Shanghai Gigafactory plant on line late this year is important.

GAAP free cash flow burn of $919.5 million was slightly better than $1.05 billion in the prior-year quarter but far from the roughly $900 million positive free cash flow in each of the third and fourth quarters of 2018. The cash balance fell by $1.5 billion from Dec. 31 to $2.2 billion. We suspect the market was expecting something worse for cash on hand, and if management can deliver on curbing the negative working capital impact of the wave, we are not worried about cash for 2019. Management expects positive free cash flow for each of the remaining 2019 quarters, a significantly reduced second-quarter loss versus the first quarter, and third-quarter profitability.

We do continue to be concerned about Tesla's recourse debt of $6.5 billion. The company retired its $920 million of convertibles in the quarter but has $566 million of legacy SolarCity convertible bonds due in November 2019 that, at a $759.36 strike price, will almost certainly have to be refinanced or paid via cash. We suspect, given CEO Elon Musk's prior comments on wanting to retire debt, that these bonds will be paid off rather than refinanced. For a long time, we've wanted Tesla to take advantage of the halo around its stock and raise more capital to take tail risk off the table. Musk has sounded unwilling to do that in recent quarters but sounded more willing to raise capital when asked on the earnings call, saying there's "some merit" in a capital raise, so we would not be surprised to see an equity raise soon this year. Musk understandably said he does not want capital raises to be a substitute for operating efficiently, but with him leading Tesla and the firm's share count very low compared with other automakers at only about 173 million, we think the market would quickly forgive the dilution. We now model a $2 billion capital raise in 2019.