Tesla Burns A Record $13 Million Per Day In Q2... And It's About To Get Worse

One month after Tesla stock tumbled when the electric car maker announced that it had missed Wall Street estimates for the second quarter, delivering only 22,000 vehicles instead of the 22,912 expected, moments ago Tesla reported adjusted, non-GAAP Q2 earnings which beat expectations, with an adjusted loss of $1.33, better than the -$1.88 expected, which curiously was identical to the -1.33 loss in Q1. 

In the second quarter, Tesla generated revenue of $2.79 billion, also better than the $2.51 billion expected, and reported that Q2 Automotive gross margin was 25.0% non-GAAP, below the 25.48% expected.

Tesla continued to burn cash, and in the second quarter it outdid not only itself but Netflix too, with a record cash burn of -$1.16 billion - or roughly $13 million per day - almost double what it burned in Q1. In Q3, Tesla's CapEx was $959 million, a number which is set to surge as the Model 3 launch continued well into into Q3: Tesla expects it will burn another $2 billion in CapEx in the second half.

Understandably, the cash burning behemoth was proud to announce that it had more than $3 billion in cash on hand at the end of Q2. There is just one problem, and this wasn't announced in the letter: Tesla also $3.9 billion in accounts payable and accrued liabilities, as the company drains all net working capital sources of cash it can find. Meanwhile, accounts receivable actually declined. This was the first quarter in which paybales and accrued were nearly $1 billion more than cash and equivalents!

In terms of deliveries, there were no surprises: as the company already disclosed, it delivered 22,026 Model S and Model X vehicles in Q2, a total of 47,077 in the first half of the year. Model S and Model X combined. Ever optimistic, the company projected that Model S and Model X deliveries will increase in 2H’17 vs 1H’17. Of course, they better or else the company will badly miss its full year estimates.  Tesla also said it is confident it can produce just over 1,500 of its brand new Model 3 vehicles 3Q. Further, Tesla said it was averaging over 1,800 net Model 3 reservations per day since the unveiling last week.

Specifically on the rampup of Model 3, Tesla said that it is confident it can produce just over 1,500 vehicles in Q3, and achieve a run rate of 5,000 vehicles per week by the end of 2017, while it continues to plan on increasing Model 3 production to 10,000 vehicles per week at some point in 2018.

As long as there are no more 100kWh battery pack fiascoes of course. And speaking of that, why was there no discussion in the letter about yesterday's unexpected departure of Tesla's chief battery engineer?

Looking ahead, Tesla expects Model 3 to be (non-Gaap( gross margin Positive in 4Q, but first, in Q3 Model 3 gross margins will tumble as they will be impacted by "excessive allocation of labor and overhead costs and depreciation over tiny volume." As a result, Musk warned Tesla's adjusted automotive gross margin will drop below 20% in 3Q. Translation: even more cash burn. To wit:

Several factors will influence our non-GAAP automotive gross margin for the rest of this year. The combined non-GAAP gross margin for Model S and Model X in Q3 will decline slightly from Q2, driven primarily by mix shift. Additionally, during the initial phase of the Model 3 ramp in Q3, the volume produced will be tiny relative to the installed production capacity. As a result, Model 3 gross margin in Q3 will be temporarily impacted by the excessive allocation of labor and overhead costs and depreciation over this tiny volume. In the absence of these one-time elevated cost allocations, Model 3 gross margin in Q3 would already be positive, resulting in a positive cash contribution. As capacity utilization improves, Model 3 non-GAAP gross margin is expected to be positive in Q4, and should improve rapidly in 2018 to our target of 25%. Consequently, we expect non-GAAP automotive gross margin to temporarily dip below 20% in Q3, before recovering in Q4 and beyond.

Amusingly, this is how Tesla explained it was prepared to deliver up to half a million Model 3 cars annually:

"At our Fremont factory, the new Model 3 body welding line and multilevel general assembly line are highly dense and automated. This densification sets the stage for us to produce over 500,000 Model 3 vehicles annually."

Yet despite the euphoria spun by Elon Musk surrounding the Model 3 launch, customer deposits continued to decline, and in Q2 dipped again, down to $603MM from $616MM on March 31.

Oh, remember the Solar Roof thing? No? There's a reason for that: Tesla hasn't installed a single one for an actual customer yet. The good news: Tesla's own employees are now energy independent: "The first Solar Roof installations have been completed recently at the ho mes ofour employees, who we chose to be our first customers to help perfect all aspects of Solar Roof customer experience."

Finally don't expect the cash burn to end any time soon: as it stated in its letter, capital expenditures should be about $2 billion during the second half of 2017, "as we make milestone-based payments for Model 3 equipment, continue with Gigafactory 1 construction, and expand our Supercharger, store, delivery hub, and service networks."

In other words, tons of new boondoggles are coming down the pipeline just to make you ignore the unprecedented amount of cash the company is currently burning.

And speaking of boondoggles, the big one is coming: While delivering the first Model 3 cars was a major company milestone, we are now focused on the critical steps to ramp Model 3 production. We remain confident in our plans and look forward to the upcoming unveiling of the next exciting addition to our portfolio of electric vehicles – Semi Truck.

Meanwhile, as Tesla's 2017 EPS forecast continues to sink, its stock continues to grow.