Tesla: 3 Things that I’ve learned from the 2016 results

Income statement will keep evolving in the following years

Tesla’s 16Q4 results are out and they are, basically, meaningless. The next couple of quarters won’t give much of an idea about the Income Statement in the long-term. Solar City acquisition will take time to digest and there are more variables that will increase its complexity.

The only sure thing stemming from the 16Q4 conference call is the idea that Tesla business model will evolve substantially over the next couple quarters. And I am not just talking about the integration of Solar City; I am also talking about Grohmann Engineering and the possibilities to create a significant business unit around manufacturing equipment.

Most analysts following Tesla are already aware of the ride-sharing services but the possibility to create services around Tesla products doesn’t end here. Another possibility is Tesla leading the revolution in vehicle insurance. Jonathan McNeill mentioned the following in 16Q4 conference call:

“So, it’s our vision in the future that we’ll be able to offer a single price for the car, maintenance, and insurance, in a really compelling offering for the consumer.”

Putting it all together, it doesn’t make much sense focusing on gross margin, because there will be a lot of variables affecting it in the medium-term.

Model 3 seems to be on the right track

Model 3 is a step in the right direction. The car was design to be production friendly. Several components were reduced to a reasonable minimum. A simple example is the fact that Model 3 is using half the length of the wire of the Model S.

Additionally, during the 16Q4 conference call, Elon Musk revealed that Tesla is now capable of attracting quality suppliers for its operations, which wasn’t possible a while ago. This will definitely affect production speed and production quality going forward.

At this point, we are aware that Model 3 will most likely seal Tesla’s fate. The company needs to get close enough to the milestone of 500.000 cars by 2018, to prove that it can be a serious player in the auto field and that it deserves its premium market capitalization.

Increased likelihood of a capital raise

I wasn’t expecting this so soon, but the current strategy of not backing-off in any front makes it a necessity. The company is investing so much in production tools that its capital expenses are way bigger than any normal company with a similar size could support. Only Tesla can do it because it is leveraging its market capitalization. At this point, it would be a huge risk not to take advantage of the opportunity to raise capital. If an economic downturn comes, Tesla could face huge difficulties if it neglects its cash balance.

All-in-all, I remain positive on the company and added a couple of shares on the yesterday’s tumble. I’ll keep the production issues under the radar and may add more shares if good opportunities arise.

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