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Bernstein Entertains Possibility Of Tesla Achieving Positive Net Income, FCF This Year

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Bernstein Entertains Possibility Of Tesla Achieving Positive Net Income, FCF This Year
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Tesla Inc (NASDAQ: TSLA) projects positive net income and free cash flow in the third quarter. While most on the Street regard the goal with disbelief, Bernstein is more open-minded.

The Rating

Bernstein analyst Toni Sacconaghi Jr. maintained a Market Perform rating on Tesla with a $265 price target.

The Thesis

The analyst considers Tesla’s targeted achievement “unlikely” this year — but doesn’t rule it out entirely.

“If Tesla can deliver on all components of its guidance, then we see a possibility that it can generate positive net income in the 2H,” Sacconaghi Jr. said. “But the assumptions are significant.”

Tesla would have to deliver on ambitious gross margin, operating expense and working capital goals, each of which are seen to face headwinds.

To start, Sacconaghi Jr. said less-than-expected fixed cost leverage could limit Model 3 gross margin improvements, although he conceded that high average selling prices could help.

At the same time, Tesla may have difficulty cutting operating expenses — a “critical variable" — without compromising customer service or growth. Factoring in synergies from the SolarCity segment, Sacconaghi Jr. models for 16-percent opex growth, a rate he said is “aggressive.”

Finally, by the analyst's assessment, Tesla's working capital can improve and materially drive FCF in the second half but would prove a one-time boost. The metric is expected to hurt FCF in the long run as international deliveries and increasing stock keeping units drive inventory days.

Price Action

Tesla shares were up 4.43 percent at $289.07 mid-morning Monday.

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Photo courtesy of Tesla. 

Latest Ratings for TSLA

DateFirmActionFromTo
Oct 2018Canaccord GenuityMaintainsHoldHold
Oct 2018JMP SecuritiesInitiates Coverage OnMarket Outperform
Oct 2018MacquarieInitiates Coverage OnOutperform

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