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Tesla's Cash Flow Improves Despite Consensus Miss

David Whiston, CFA, CPA, CFE (david.whiston@morningstar.com)

Tesla's TSLA second-quarter results show why we feel investing in the company carries a high amount of risk and uncertainty. Adjusted diluted EPS, which excludes stock option expense, was a loss of $1.12 which missed consensus of a loss of $0.40 but improved from first quarter's loss of $2.90. Revenue grew 59% year over year and 40% sequentially to $6.35 billion, slightly under consensus of $6.41 billion. The stock fell 11% in July 24 afterhours trading on the EPS miss as well as due to news that CTO J.B. Straubel, who has been with Elon Musk since the start of Tesla, will be stepping away from day-to-day operations to a senior advisor role to be replaced by technology vice president Drew Baglino. We are aware of concern about the frequent manager turnover at Tesla, but this move to us seems Straubel needs a break rather than due to any problems between him and Musk. Straubel spoke on the earnings call saying he is not going anywhere and remains involved with Tesla's new technology but not in an operational role.

2019 delivery guidance remains 360,000-400,000 vehicles and management said it feels the company is self-funding and able to generate free cash flow except possibly during product launches such as the Model Y crossover next fall. We have heard this assertion on self sufficiency as recently as late last year and then Tesla raised capital in 2019 so we are somewhat skeptical. We are leaving our fair value estimate in place but if we feel market sentiment becomes too negative, we will lower our fair value estimate on a higher weighted average cost of capital as we did with a reduction to $171 back in May, which we then reversed on July 3 to $231. We remain concerned about Tesla's debt load as recourse debt is now about $7.8 billion and we estimate about $3 billion due through Spring 2022, including a $566 million SolarCity convertible note due this November. Free cash flow this quarter was $614 million, an impressive $1.5 billion improvement from first quarter.

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