Tesla’s production challenges and cash flow problems should bring CEO Elon Musk down from orbit following his successful SpaceX launch.

Musk did have reasons to be cheerful, as revenue increased and deliveries of the Model S and Model X also up significantly on last year. Tesla’s CEO was much more upbeat in the analyst call compared to the previous quarter, where he lambasted journalists and questioned the competency of the analysts. Annual revenue had jumped 68% to $11.8bn in 2017, and Model S and Model X deliveries and orders were up on 2016.

The company continues to have a significant cash flow problem and production on the Model 3 remains stubborn. Quarterly losses have continued to mount, and all in the company made a net loss of $2.2bn in 2017. While Model S and Model X have grown, the company was much more reticent on Model 3 production figures, reiterating its production target of 5,000 a week by Q2 2018- the original target was the end of 2017. Overall gross margins for the year were down on 2016, from 25.2% to 22.9% in 2017 (23.1% to 21.1% when adjusted for ZEV credits, a carbon emission trading scheme for automotive manufacturers in some US states).

Tesla reiterated its ambitious production targets, although this was reliant on further automation of the production line. Tesla made just 2,425 Model 3s in Q4, and has pushed back production targets multiple times. The Q2 target was also heavily cautioned. The perceived solution is further automation to the production line, with the Gigafactory taking delivery of the production lines in March. However, these are coming from Germany, and have to be disassembled, shipped, then reassembled, testing the Q1 production target of 2,500 a week.

While Tesla beat analyst expectations in its quarterly cash flow, posting a less severe loss, closer inspection reveals many underlying problems beyond creative accounting, as the company continues to burn through cash and becomes increasingly reliant on capital markets to fund itself. Since its initial public offering in 2010, Tesla has burned through $10.6bn in cash.  Tesla doesn’t count its solar energy systems to be leased as capital expenditure, and also counts customer deposits as operating cash flow, despite being refundable and not a result of current activities.

Tesla was once again looking to the future in the earnings call, calling 2018 a “transformative year” for the company. Although it will ramp up production of Model 3s and attempt to ramp up scale, it is also expanding its sales network. However, questions remain about whether this can be achieved outside the US, with infrastructure still being developed despite promises of installation by 2016.

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Musk joked in the analyst call that “If we can send a Roadster to the asteroid belt we can probably solve Model 3 production”. Despite a slightly shaky performance in the stock market in the aftermath of the earnings release, investors still appear to have faith in Tesla for now. However, the company needs to urgently improve its scale and cash flow.

Credit to: Marketline.com/