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It has been a moderate performance from Tesla shares over the last 12 months, certainly some of the worst immediate fears have not materialised, but the outlook is a little dubious. Back to back quarterly profits will get headlines but one must fear that Tesla founder Elon Musk is robbing Peter to pay Paul in order to achieve it and the guidance for 2019 looks very weak.

Earnings missed expectations despite much better revenues. Operating income is steady at $414 million, while profits have been hit by decline in regulatory credits, lower prices in China, higher import duties on parts from China and the introduction of a lower-priced mid-range Model 3. These are all familiar problems for many firms in the US high tech space.

There was nothing in the recent Tesla earnings call on financing, which suggests the free cash flow in the last few months was enough to shore up the balance sheet for now. Management reiterated it has the cash to cover the $920 million in convertible bonds which are due in March. There has been some doubt around this, so investors should be relieved on that front at least.

“We note that capex has been slashed; seemingly Tesla has pulled back massively on investment to find the cash from operations,” observes Neil Wilson, Chief Market Analyst at Markets.com. “Capex, having been guided around $3.4 billion in 2018 a year ago, was just $2.2 billion, equivalent to cash flow from operations. Q4 capex slid to a meagre $325 million.”

Not the kind of investment you might expect, argues Wilson, especially as it’s barely covering depreciation. Tesla’s and Musk’s currency among investors is not what it was and it looks like he is desperate to avoid tapping them again. Operating expenses were a lot lower at $667 million. That’s good of course but is it for the right reasons like efficiencies?

“The real worry was the guidance for the coming year, which suggests little to no growth compared to the average 90k for each of the third and fourth quarters,” Wilson adds. “Management guided sales of 360k-400k in 2019. The top end suggests growth of about 10% versus the H2 2018 rate, while the lower end would mean flat sales.”

Tesla has managed to get production going and is hitting the numbers, but can it be sustained, let alone ramped up? At this point you’d anticipate higher sequential quarter on quarter growth, albeit factors like the bringing forward of sales ahead of January may be a factor.

Demand will certainly suffer in 2019 versus 2018 after the federal tax credit on Model 3s was slashed on Jan 1st. Watch for a potential price slide on Tesla shares once we see the Q1 numbers.

Whilst 2018 was incredibly tough, as Musk admits, the challenges are not receding. The drive to hit production targets was unsustainable as laying off 7% of the workforce demonstrated. There are also concerns about the implications of trade tariffs affecting sales in China, the key growth market.

And, kept until the end of the earnings call, long-time CFO Deepak Ajuha is leaving. Investors sold Tesla shares on that news; it’s particularly concerning as the company approaches a key phase, ramping up globally, and follows other key departures in the last year.

Tesla shares are forecast to rise today despite closing out the trading day in the US at 297. Overnight futures spot Tesla shares at a price of 308 as US trading opens.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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