Key Highlights

• Tesla ended Q1 2020 with US$5.1 billion in revenues, up 37.8% from last year. The company earned a small profit of US$16 million, despite Q1 typically being a seasonally weak quarter.
• Free cash flow turned negative at -US$895 million, with inventory built up at the end of the quarter due to the lockdowns.
• Gross Margin increased from 20.2% in Q1 2019 to 25.5% in Q1 2020 due to operational efficiencies and reducing costs. Model Y sales attained a positive gross margin during the quarter.
• Tesla announced reduced prices for standard range of Model 3 in China to take the benefit of subsidies.
• The company expects to announce the next Gigafactory in the US during Q2 2020.

Exhibit 1: Tesla Production and Deliveries

Technology Updates

Autopilot: Users with the Full Self Driving package received a software update to their Autopilot that makes their cars to respond to traffic lights and stop signs, after approval from the driver. Tesla has close to a million vehicles on the road equipped with Autopilot hardware. Unlike other companies that rely on in-house simulation data to improve their algorithms, Tesla gets first-hand, real-time data from its drivers. Tesla claims that this makes its autonomous platform more reliable than its competitors.

The company said that for the above software release it is collecting data from over one million intersections per month, and expects this to exceed a billion intersections per month once all users get the update and people start driving again. The company has registered more than 1.2 million sessions for Smart Summon (smart parking), a feature released last year.

Increasing Range: Tesla increased the range for Model S and Model X to 391 miles and 351 miles respectively, through many incremental hardware upgrades over the months. Unlike other automakers focusing on increasing the battery size, Tesla is focusing its efforts on battery technology and incremental upgrades in hardware and software, extracting more range from the same battery size. For example, the company installed a new heat pump in the Model Y to increase battery range.

Structural Design: The company introduced two-piece castings technology to make the structure for Model Y. Instead of many smaller components separately machined and joined, the Model Y structure uses two high-pressure die-cast aluminum castings (one for the front and one for the rear), joined to form the entire structure, bringing more strength and making the structure lighter. It also reduces waste, and is simpler and cheaper to manufacture. The company plans to introduce a unibody structure in the future.

Forecast

Tesla’s Fremont plant has been shut down since March 23^rd in response to government orders to curtail the spread of coronavirus. The Fremont plant is an important one for Tesla as it produces the vast majority of Model X and Model S, most Model 3, and all of Model Y. Counterpoint expects a steep fall in sales during Q2 2020 (and probable overhang during Q3 2020) due to prolonged plant shutdowns. Vehicle sales in the US are expected to decline by around 25% in 2020. Over dependency on the US market will adversely impact Tesla sales during the year. The recovery in China, and ramp-up in production (expected 4,000 Model 3 per week) will, to some extent, offset the declines in other markets during the year.