Why Tesla Inc (NASDAQ: TSLA) stock is surging

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Tesla Inc (NASDAQ: TSLA) stock rose over 7.3% in the pre-market session of April 30th, 2020 (as of  8:56 am GMT-4 ; Source: Google finance) after the company posted better than expected results for the first quarter of FY 20.

Tesla also generated negative free cash flow of $895 million, which will complicate its previously targeted goal of being free cash-flow positive for 2020. The company’s “capacity installed” is expected to reach 500,000 vehicle deliveries in 2020, but it is uncertain how quickly its U.S. car plant, and suppliers, can ramp up production after Covid-19 restrictions. The company’s near-term profit guidance is “currently on hold,” which makes it difficult to achieve its first full year of profitability. The government had ordered shutdown of its factory in Fremont, California, which was idle since March 24 with stay-at-home orders running until at least May 31. The company did not update its previous forecast of delivering half a million vehicles by the end of 2020.

Further, the company is lowering the price of some of its Model 3 vehicles in China so that consumers and the company can snap up new energy vehicle incentives there. Shanghai Model 3 margins expanded dramatically since four quarter of last year, nearing equivalents of Model 3’s built in Fremont. This is despite not yet running at full capacity, while also managing through the production shutdown in early February.

Moreover, the company’s free cash flows were impacted by the temporary increase in end of quarter inventory for all its products that resulted due to the abrupt suspension of production and delivery operations. Had these interruptions not occurred, the company would have posted a record quarter of deliveries and strong free cash flows. The company’s operations at its Shanghai plant were progressing better than expected, with production rates of its Model 3 sedan anticipated to hit 4,000 units per week, or 200,000 per year, by mid-2020.

TSLA in the first quarter of FY 20 has reported the adjusted earnings per share of $1.24, beating the analysts’ estimates for the adjusted loss per share of 36 cents. The company had reported the adjusted revenue growth of 35.9 percent to $5.99 billion in the first quarter of FY 20, beating the analysts’ estimates for revenue of $5.90 billion, according to a survey of analysts by Refinitiv. Automotive revenue stood at $5.1 billion during the quarter, and nearly 7% of that came from regulatory credits. The credits helped the company to increase its automotive gross margins, which it says are now up to 25.5%.

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