Tesla posted massive losses when it announced its Q1 earnings results on Wednesday, its first financial report after losing a $7,500 EV tax credit on January 1 of this year. 

After pulling out all the stops to deliver a record 90,700 cars in Q4 2018, Tesla delivered just 63,000 cars this quarter. That’s a drop of 31 percent, below the company’s moving-target guidance and below analysts’ already lowered expectations.

Tesla began its Model 3 delivery efforts in Europe and China this year, and the delivery miss can be partially attributed to the headwinds of overseas transport, homologation, new distribution channels and tariffs. But Tesla’s most profitable vehicles, the S and X, saw their deliveries drop 56 percent from the previous quarter — and that’s bad news for margins.

At the end of 2018, CEO Elon Musk said that he was optimistic about being profitable in the first quarter "and all quarters going forward." The target was to reach "a very small GAAP net income in Q1." Later in the quarter, confronted with this delivery shortfall and a decline in average selling prices, Musk said he expected Q1 net income to be "negatively impacted."

In this case the negative impact was a net loss of $702 million.

This quarter-to-quarter drop in sales at Tesla breaks an almost two-year growth streak and could threaten Tesla's growth narrative and valuation.

Here are the key takeaways for Tesla's difficult first quarter of 2019.

  • Tesla had a GAAP operating loss of $522 million.
  • Its GAAP net loss was $702 million, the largest ever quarterly negative cash flow from operations.
  • The firm had cash and cash equivalents of $2.2 billion at the end of Q1, down $1.5 billion from the end of 2018. 
  • Model 3 gross margin was down slightly to ~20 percent in Q1.
  • Tesla posted a loss of $2.90 per share, a significant miss from expectations of a 69 cents per share loss.
  • Revenue was $4.5 billion versus consensus of about $5.2 billion, another big miss. 

Tesla stands behind its 2019 guidance

The company reaffirmed its guidance of 360,000 to 400,000 vehicle deliveries in 2019, an increase of 45 percent to 65 percent compared to 2018. Given the Q1 miss, meeting Tesla's guidance will require more than 100,000 vehicles built per quarter in 2019, a higher level than Tesla has ever achieved. It will require a sustained rate of 7,500 units per week, more than the Fremont factory has been able to maintain, and perhaps more than its paint shop or production line can handle.

There is a chance that Tesla's China factory will be built and producing vehicles in 2019; construction progress on that site in Shanghai appears to be moving at an unprecedented speed. Musk claimed that the factory will be almost fully funded through local debt and has "already secured an approximately $522 million credit line from local banks."

Tesla's investor letter claims, "If our Gigafactory Shanghai is able to reach volume production early in Q4 this year, we may be able to produce as many as 500,000 vehicles globally in 2019. This is an aggressive schedule, but it is what we are targeting. However, based on what we know today, being able to produce over 500,000 vehicles globally in the 12-month period ending June 30, 2020 does appear very likely," adding, "We continue to target a 25 percent non-GAAP gross margin on Model S, Model X and Model 3, depending on variant mix and option take rates as our product offerings change."

Tesla expects operating cash flow less capex to be positive in every quarter including Q2 and expects "to return to profitability in Q3 and significantly reduce our loss in Q2."

Solar struggles, storage limited by cell production 

Tesla talks a good game about its residential solar and energy storage business, allowing customers to purchase "directly from our website, in standardized increments of capacity. We aim to put customers in a position of cash generation after deployment with only a $99 deposit upfront. That way, there should be no reason for anyone not to have solar generation on their roof."

But the quarterly solar numbers paint a story of a deteriorating business, despite any brave claims to the contrary. Energy generation and storage revenue in Q1 decreased by 13 percent over Q4 2018, driven by a severe decline in solar deployments that fell from 73 megawatts to 47 megawatts, down about 36 percent quarter-over-quarter and year-over-year. Gross margin of the solar and storage business in Q1 dropped to 2.4 percent.

Tesla, and before that SolarCity, has not deployed as low a figure as Q1's 47 megawatts in more than five years — when solar was considerably more expensive than it is today. Data from Wood Mackenzie Power & Renewables shows that Tesla's residential installation volumes nearly halved from 650 megawatts in 2016 to 352 megawatts in 2017, and fell again last year to 208 megawatts.

Musk said that the solar roof product was already on "version 3," although one would be hard-pressed to locate a roof with version 1 or 2.  Almost three years after its introduction, and after having received deposits from interested homeowners, Tesla has connected just a dozen or so solar-integrated roofs to the grid. Tesla plans to ramp up the production of the solar roof with "significantly improved manufacturing capabilities during 2019."

Energy storage production in the second half of 2018 was limited by cell capacity as Tesla "routed all available Gigafactory 1 cell capacity to supply Model 3." Some cell production has been redirected to the energy storage business, enabling a production increase in Q1 "by roughly 30 percent compared to the previous quarter."

Tesla's energy storage business built one of the world's largest batteries in 2018, while deploying a total of 1.04 gigawatt-hours of energy storage, an impressive tripling of its 2017 figure. Tesla's letter from last quarter claims that "a better supply of cells and new manufacturing equipment" will grow storage deployments to "over 2 gigawatt-hours in 2019" with growing profitability.

There must be a pony in here somewhere

So, is there some good news in this money-losing quarter? Certainly. 

Model 3 was again the best-selling premium car in the U.S. in Q1, outselling the runner-up by almost 60 percent, according to Tesla's investor letter, which added, "This is not surprising given that, for the first time in history, the price of an electric vehicle is lower than its gas-powered equivalents."

Musk said, "We believe it will be the best-selling premium car in the world."

Tesla is selling lower-priced variations of the Model X ($83,000) and Model S ($78,000) and has refreshed these models with a new drivetrain and adaptive suspension system. Additionally, the range of the longest-range Model S has been stretched to 370 miles, enough to make it from San Francisco to Los Angeles without a pit stop to charge up, according to Musk. 

Musk is bullish on Tesla's vehicle production in China, saying, "We can now build a second-generation Model 3 line in China that we expect will be at least 50 percent cheaper per unit of capacity than our Model 3-related lines in Fremont and at Gigafactory 1."

As far as the capital necessary to fund its operations and new projects, Musk writes, "Our 2019 capex, the vast majority of which will be to grow our capacity and develop new vehicles, is expected to be about $2.0 to $2.5 billion. We believe this amount should be sufficient to continue to develop our main projects, such as Gigafactory Shanghai, Model Y and Tesla Semi, as well as for the further expansion of our Supercharger and service networks."

When asked by an analyst if he would prefer Tesla to be a private company, Musk replied, "That ship has sailed."