• We remain positive on the Tesla story, given our view that near-term results (Sep-18 and Dec-18) will likely ease investor concerns regarding cash. Longer-term, talent retention will be a key indicator of greater upside to the Tesla story. Here’s a quick preview of the key metrics in the Sep-18 quarter:
• Based on comments made in Musk’s September 7th blog post, we expect Tesla to produce 78.3k vehicles (including 53.5k Model 3s) in the Sep-18 quarter, up from 53.3k total vehicles (including 28.6k Model 3s) in the Jun-18 quarter.
• We expect Model 3 gross margins of 15%, in line with guidance. Our expectation is based on the company limiting configurations to more expensive options, along with high-margin software conversion, yielding a higher ASP ($55k). We also expect the company to maintain its 20% Model 3 target for Dec-18.
• We believe Tesla can generate more than $500M in free cash flow, compared to negative cash flow of $130M last quarter.

Bull-Bear Debate Will Likely Continue

While the company will likely hit its targets for production and profitability in Sep-18 and maintain similar profitability in Dec-18, the bull-bear discussion will continue. In place of concerns about production velocity, the central question of the continued debate will be Model 3 demand and gross margin. The U.S. tax credit will begin to fade, going from $7,500 through the end of 2018 to $3,750 in 2019. As Tesla works through pent-up demand and backlog of preorders, questions will arise about sustained demand. Further, investors will look for increasing gross margins as the company begins to sell lower-priced Model 3s, moving toward the base price of $35,000. 

Our Central Belief

Tesla has the best-positioned product roadmap in tech, creating and capturing value from the simultaneous transitions to EVs, autonomy, and sustainable energy. While demand for Model 3 may be lumpy over the next several years, we believe the car will successfully drive the electric transformation of the auto industry. In other words, if Model 3 can deliver on the demand that we anticipate, the company will have the resources to pursue other legs of its mission.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.