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Why Tesla, Inc. Stock Fell Thursday

By Daniel Sparks - Feb 8, 2018 at 2:02PM

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Until Model 3 production ramps up, cash burn will remain a problem.

What happened

Shares of electric-car company Tesla (TSLA -0.54%) took a hit on Thursday, falling as much as 6.8%. The stock is down 6.1% at the time of this writing. The stock's decline comes after Tesla's fourth-quarter earnings report, which featured a narrower-than-expected non-GAAP loss per share.

Though Tesla reaffirmed in its fourth-quarter earnings call that it remains on track with its most recently updated targets for Model 3 production, investors may be concerned about its rapid cash burn.

Tesla vehicle production at its factory in Fremont, California

Image source: Author.

So what

By the end of the first quarter, Tesla said it is on pace to achieve a weekly production rate of 2,500 Model 3s per week -- an encouraging sign since the end of the first quarter is less than two months away. But free cash flow will likely remain negative in the first quarter as the company estimates a negative Model 3 gross margin during the period.

Tesla also forecasts 2018 capital expenditures to be slightly higher than in 2017. Capital expenditures in 2017 were $3.4 billion -- up from $1.3 billion in 2016.

It's also worth noting that while its fourth-quarter adjusted loss per share was narrower than expected, a GAAP loss per share of $4.01 was marked as its worst loss ever.

Now what

Longer term, Tesla expects its Model 3 gross margin to reach 25%. To get to this point, however, production of the new vehicle will need to stabilize at 5,000 vehicles per week -- a feat it doesn't believe it will achieve until the end of the second quarter.

In 2018, investors should look for Tesla to execute swiftly on its Model 3 production ramp. Until the electric-car maker can rev up Model 3 production and deliveries to higher-volume levels, Tesla is at risk of needing to raise more capital.

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