Tesla Stock: Third-Quarter Earnings Explained

Tesla Motors (TSLA 4.96%) is down almost 10% today after the company posted disappointing third-quarter results. What happened?

The results
Telsa actually slightly outperformed revenue and EPS estimates, posting a non-GAAP profit of $0.12 per share and non-GAAP revenue of $603 million, up 9% from the first quarter. Even more, Tesla was actually free cash flow (cash from operations less capital expenditures) positive for the quarter, reporting record free cash flow of $49 million.

Vehicle sales were up sequentially, too – hitting just over 5,500 deliveries. The number meaningfully beat Tesla's own guidance for the quarter of "slightly over 5,000 Model S vehicles."

Source: Tesla's respective quarterly letters to shareholders.

Tesla's guidance has proven to be fairly accurate – so a large outperformance on the top line should have been considered an unlikely scenario. Given that management typically reports earnings more than a month into the next quarter (giving management a solid visual of next quarter's results by the time it reports guidance), it's no surprise that Tesla's results aren't drastically different than the company's guidance.

Tesla also continued to make impressive progress toward its ambitious goal to hit a non-GAAP automotive gross profit margin, excluding zero emission vehicle, or ZEV, credits, of 25% by the fourth quarter. Telsa's automotive gross margin was up to 21%, from 14% last quarter. That's 200 basis points higher than the minimum of a 19% I had expected Tesla to report. Even more, it leaves Tesla just 400 basis points from its fourth-quarter goal.

The electric-car maker continues to expand internationally and delivered 1,000 deliveries to European customers, up from zero deliveries outside of North America last quarter.

Demand continues not to be an issue for Tesla. The company remains supply limited. In order to fulfill European orders Tesla actually had to constrain North American deliveries, Tesla CEO Elon Musk said during the earnings call yesterday. Tesla CFO Deepak Ahuja elaborated further, saying that Tesla actually saw a "pretty solid increase" in reservations from Q2 to Q3.

Production continues to improve, albeit slowly. Weekly vehicle production was up to 550 from 500 in the second quarter. The slow gain shouldn't be a surprise: Tesla emphasized through its conservative guidance in the Q2 letter to shareholders and comments in the Q2 earnings call that the company didn't expect to make meaningful progress in its production bottlenecks until 2014. 

So what gives?
If results were predictably solid, why did shares fall? It likely has something to do with the fact that the Street had unspoken expectations for Tesla to guide for more rapid production gains. Tesla's expectations for full-year deliveries of 21,500 rose only by 500 vehicles.

Furthermore, voluntary VIN number tracking going on over at Tesla's forums suggested Tesla may have been ramping up production much faster than Q2 guidance had suggested. Notably, however, the VIN tracking seemed to be dubious indicator of production. But that didn't stop some silly Tesla analysts from taking the data into consideration.

For the most part, Tesla investors find themselves in the same spot they were in before the company released third-quarter-earnings results: waiting for the company to ramp up production and meet growing global demand. Results, international expansion plans, and guidance still support the same underlying growth story.