Tesla, Inc. (NASDAQ:TSLA) cash flow improves, but is it sustainable?

Tesla, Inc. (NASDAQ:TSLA) cash flow improves, but is it sustainable?

Tesla, Inc. (NASDAQ:TSLA) cash flow improves, but is it sustainable?

While Tesla lost a ton of money last quarter, it did generate $614 million of free cash flow. That was a nice turnaround from the first quarter, when it burned through more than $900 million.

The return to positive cash flow wasn’t very surprising. Tesla produced 87,048 vehicles in the second quarter, whereas it delivered 95,356. Assuming an average selling price between $50,000 and $60,000, Tesla’s sales of vehicles that had already been built may have added as much as $500 million to its cash flow last quarter. This was pretty much a one-time boost, as Tesla exited the quarter with very lean vehicle inventory.

Furthermore, capital expenditures totaled just $250 million last quarter. While Tesla reduced its full-year capex guidance this week, it would still need to spend an average of nearly $500 million a quarter in the second half of 2019 just to hit the low end of its new guidance range.

Normalizing for its inventory reductions and a more sustainable level of capex, Tesla’s free cash flow would likely have been negative again last quarter. It remains to be seen whether the company can improve its underlying cash generation to keep free cash flow strongly positive over the next several quarters.

More orders and deliveries needed to hit 2019 targets

In conjunction with the earnings report, Tesla maintained its forecast that it will deliver between 360,000 and 400,000 vehicles in 2019. It delivered just 158,375 vehicles in the first half of the year, though. Thus, quarterly deliveries would need to average more than 100,000 over the next two quarters just to reach the low end of the guidance range.

On its face, that seems achievable. After all, Tesla delivered more than 95,000 vehicles in the second quarter, so its delivery pace wouldn’t have to accelerate all that much.

However, demand and supply both represent potential hurdles that could hamper Tesla’s ability to reach its goal for deliveries. On the supply side, Tesla produced just over 87,000 vehicles last quarter, so it would need to substantially raise output to reach its target. That might be feasible, but management has repeatedly overestimated Tesla’s ability to implement sustained production increases over the past few years.

As for demand, Tesla’s Q2 order activity may have been boosted by a looming cut to the federal tax credit for U.S. buyers. So far, there hasn’t been a sharp drop-off in orders this quarter, but the recent price cuts do cast doubt on the strength of demand.

Vehicle orders have continued at a healthy pace this month, according to Tesla.

Two things that could change Tesla’s trajectory

On Tesla’s earnings call last week, Musk postulated that demand for the company’s vehicles could surpass 2 million units annually within a few years. Tesla stock’s post-earnings plunge makes it clear that most investors see this as wishful thinking. Indeed, just reaching the low end of this year’s forecast by delivering 360,000 vehicles seems like it could be a stretch.

Yet this notional target isn’t as outrageous as it may seem. Tesla is on track to start building the Model 3 in China later this year. That will allow it to avoid hefty import tariffs, enabling lower prices that could drive a surge in orders. Meanwhile, production of the Model Y crossover could begin as early as next year. Given that most consumers prefer crossovers to sedans these days, it’s plausible that the Model Y will outsell the Model 3 by a wide margin.

On the other hand, Tesla will face dramatically more competition a couple of years from now than it does today. The Chinese auto market has been in free fall for the past year, so counting on China to drive a substantial amount of growth seems like a dubious proposition. And under current law, the Model Y won’t benefit from any federal tax credits in the U.S., which could put its price tag out of reach for most consumers.

The disappointing second-quarter earnings report wasn’t a sign that Tesla is doomed. That said, it raised a lot of uncomfortable questions about whether the company can achieve its lofty goals. Investors are still waiting for answers.

Overall, the bias in prices is: Downwards.

By the way, prices are vulnerable to a correction towards 238.67.

The projected upper bound is: 251.07.

The projected lower bound is: 204.85.

The projected closing price is: 227.96.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 6 white candles and 4 black candles for a net of 2 white candles. During the past 50 bars, there have been 26 white candles and 24 black candles for a net of 2 white candles.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 22.3851. This is not an overbought or oversold reading. The last signal was a sell 4 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 43.13. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 1 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -123.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a sell 1 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 1 period(s) ago.

Rex Takasugi – TD Profile

TESLA INC closed down -0.780 at 228.040. Volume was 6% below average (neutral) and Bollinger Bands were 4% wider than normal.

Open     High      Low     Close     Volume___
226.920 230.260 222.250 228.040 10,027,697
Technical Outlook 
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bearish
Moving Averages: 10-period     50-period     200-period
Close: 251.01 221.35 281.58
Volatility: 92 65 64
Volume: 9,611,488 11,031,301 9,511,131

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

TESLA INC is currently 19.0% below its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect volume flowing into and out of TSLA.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on TSLA.O and have had this outlook for the last 30 periods.

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