• Tesla reported its Mar-18 quarterly results after the market closed on Wednesday and it’s clear that investors are having trouble seeing the forest through the trees.
• The company maintained its previous target of exiting the Jun-18 quarter at a run rate of 5,000 Model 3s produced per week.
• Shares were trading down about 5% after hours largely due to a comment on the earnings call suggesting a ramp in gross margins on the Model 3 is lagging six months behind target, which needles at the Tesla cash burn topic.
• Focusing on Model 3 near-term gross margins misses the point. The company reiterated that it expects to be GAAP profitable and cash flow positive by year-end, and will not to tap the capital markets for cash.
• Tesla is undergoing cost-cutting measures and reduced its capex plans for 2018 by 12%, a positive for generating cash.

Model Y Now Coming 2020. The release of the Model Y (lower-priced SUV) was pushed out a year to 2020. For the first time, Tesla made it clear that they will build another factory for Model Y production, likely in China, starting sometime in 2019. We believe that when the company begins to generate cash, they will have the ability to raise money to fund a new manufacturing facility. Separately, the company should be able to self-fund manufacturing expansion, as our back of the envelope math estimates they could generate $200-$300M per month in cash, which can be used for a new facility assuming Model 3 reaches 20%-25% gross margin.

Expect Volatility. To paraphrase Elon Musk’s sentiments on the earnings call: If you don’t like volatility, don’t own shares of TSLA. The March conference call was a microcosm of this volatility. That said, we continue to stand behind the Tesla story based on our belief that the company is in front of a massive opportunity related to EV, autonomy, and renewable energy. We expect they will profitably scale Model 3 production in the back half of 2018 and successfully launch Model Y thereafter.

Moats Are Lame. As VCs that look to invest in defensible companies, we were struck by Elon’s assertion that “moats are lame,” in response to a question about their supercharger network. But his rationale is sound. “The pace of innovation is the only true measure of competitiveness,” he said, arguing that moats can be a temporary competitive edge but rapid innovation is fundamentally the only way for a company to stay ahead of the competition. Herein lies the advantage that Apple, Amazon, and Tesla have over legacy competitors in the phone, retail, and automotive businesses. And herein lies our confidence in Tesla.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our 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 investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.