Tesla’s Top-Line Shot Awaits Bottom-Line Chaser

(Bloomberg Opinion) -- Step One complete for Tesla Inc.: Deliveries secured.

The company reported second-quarter production and sales numbers after the market closed on Tuesday, and they were smack in the middle of guidance. With doubts about Tesla's ability to hit its figures after the first quarter's washout, delivering more than 95,000 vehicles —  a record — provided the predictable shot in the arm for bulls and a slap in the face for short-sellers. The stock gained about 7% in immediate after-market trading.

Beyond that, though, there wasn't much additional information. It was one of the shorter delivery releases from Tesla in recent memory. The company usually provides some color around market conditions or geographical hot spots. Tesla had a line about improvements in its logistics helping out in terms of costs and working capital management, as well as orders exceeding deliveries in the quarter. It also said it would no longer provide data on vehicles in transit at the end of the quarter. Tesla said it was “well positioned” to keep growing in the current quarter. It now needs to sell just more than 100,000 vehicles in each of the next two quarters to hit the low end of its deliveries guidance.

The after-hours jump took Tesla's stock price back to about $240 — a big move, albeit only back to where it was in mid-May. That said, the stock was still priced at 161 times forward adjusted earnings just before Tesla issued the report, which indicated a fair degree of optimism already. Clearly, with the stock having slumped this year amid worries about demand — including on the part of prominent bulls — beating expectations on the top line is all that counted this time.

Yet bidding up Tesla's stock on the back of top-line growth has been a losing proposition over the past year. The enthusiasm that greeted the big quarters in the second half of 2018 gave way to angst as demand slumped at the start of 2019.

The dream of Tesla bulls is that the company will grow its way into its vast ambitions and turn a consistent profit, something it has yet to do on an annual basis. A record quarter is, therefore, encouraging. But does it offer the sort of proof that should persuade investors to bid the stock up from 161 times earnings, in the absence of additional evidence?

One of the biggest unresolved questions concerns the effect of the sales mix on Tesla's margins. Tesla's reversal in the first quarter owed a lot to a collapse in sales of the Models S and X, sparking fears that the Model 3 was cannibalizing sales of these higher-priced vehicles.

Until Tesla reports its financial results — due in about three weeks — it is simply unknown whether this record quarter delivered meaningful profit or cash flow. The last record quarter, at the end of 2018, produced a net profit of about $140 million and positive free cash flow of about $910 million. As I wrote at the time, though, both numbers benefited from remarkably tight spending on overhead and capital expenditure for a growth company, and the vehicle mix was different. Sales of greenhouse-gas emission credits also boosted the bottom line, and they may also feature prominently in the next report.

All of which is to say, Tesla delivered the shot, but the chaser is what counts.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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