Tesla reported third-quarter results with a surprise profit that blew away consensus. Adjusted diluted EPS of $1.86 easily beat consensus of a $0.42 loss and Tesla had a GAAP profit of $0.78 per share. GAAP free cash flow of $371 million declined from the prior year quarter's figure of $881 million but the company finished the quarter with a comfortable cash figure of $5.3 billion. Revenue declined year over year by 7.6% to roughly meet consensus of $6.33 billion. Total deliveries rose 16% year over year to 97,186 and by 1.9% sequentially. Model 3 should lead growth for the next several quarters until the Model Y crossover is at decent production volumes. The sedan's deliveries grew sequentially by 2.7% but rose by about 42% year over year, while Model S and X combined deliveries fell 36.9% year over year. The company is "highly confident" its 2019 total vehicle deliveries will exceed 360,000 and we agree but the top end of prior delivery guidance of 400,000 was not mentioned. The stock rose 20% after hours on Oct. 23 due to the EPS beat and Tesla saying the Model Y will now start production next summer instead of in late 2020.
Although the S & X are higher priced than the Model 3 and Model Y, we agree with CEO Elon Musk that the 3 and the Y are the future of Tesla as these vehicles will bring the volume it needs to get more scale. Given Americans' love of crossovers, it is the largest U.S. vehicle segment at over 40% of new vehicle sales, and other vehicles coming such as a pickup truck in a few years, we are substantially raising our vehicle delivery projections through 2028 which causes our fair value estimate to rise 41% to $326. We remain concerned about Tesla's debt load so if free cash flow becomes insufficient to service debt, we may raise our weighted average cost of capital. All else constant, that move would lower our fair value estimate to as low as $206. Tesla is a volatile name and fair value estimate changes may be frequent as its story changes.
Tesla has a chance to be the dominant electric vehicle firm and is a leader in autonomous vehicle technology, but we do not see it having mass-market volume for at least another decade. Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high. The Model X crossover released in late 2015 starts at about $85,000, but will average much higher with options. The Model S sedan's starting price is about $80,000. The Model 3 sedan starts at $39,490 and rolls out gradually through 2019 in other variants in foreign markets. Prices are before any tax credits, and the U.S. federal tax credit stops at the start of 2020.
Tesla is building its gigafactory--a lithium-ion battery plant under construction in Nevada--to help it produce at least 500,000 vehicles at its sole assembly plant in Fremont, California. CEO Elon Musk said in 2018 that total output in 2020 could be as much as 1 million vehicles, but that will not all be in California. A Shanghai plant opens in late 2019 and be wholly owned by Tesla. We are skeptical of the 1 million number, given Tesla sold about 245,000 vehicles globally in 2018. Even if demand exists for these vehicles, this quantity is small relative to total global auto production, which should reach 100 million units in the next few years. Thus, we think global mass adoption of pure electric vehicles is still a way off.
In the meantime, Tesla will have growing pains, possibly recessions to fight through before reaching mass-market volume, and increased its debt levels by acquiring SolarCity to become a vertically integrated sustainable energy company. It is important to keep the hype about Tesla in perspective relative to the firm's limited production capacity. Tesla's mission is to make EVs increasingly more affordable, which means more assembly plants must come on line to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will be necessary even during downturns in the economic cycle. Tesla also has more vehicles to launch, such as a pickup truck, that will demand lots of capital.
We do not see a moat yet because Tesla is still relatively early in its life cycle and has a high degree of execution risk as it adds new models and new capacity. This dynamic creates huge uncertainty as to whether the firm will succeed in making great product at an affordable price and whether enough consumers will make the switch from internal combustion engine and hybrid vehicles. There is evidence suggesting that Tesla will succeed, but if not, Tesla will remain an automaker for the wealthy. In a January 2014 Automotive News interview, Musk said in regard to Tesla making it: "I think we will, but this is not a bold assertion we unequivocally will. There is a possibility we may not."
Tesla's growth runway looks lucrative, but this growth also requires constant substantial reinvestment in platforms, the gigafactory--for which Tesla is only spending about 40% of the total cost of about $5 billion, while suppliers pay the rest--and annual assembly capacity, since the eventual output limit of Fremont is uncertain, as is the cadence of Tesla opening new plants overseas. During this growth phase, there will almost certainly be a recession or two. In times of economic uncertainty, it is difficult to say what Tesla's sales volume will be or what access, if any, the firm will have to capital markets. Tesla wants between 10 and 12 gigafactories in the long term.
We model return on invested capital below weighted average cost of capital through 2020 in light of high capital expenditure requirements and more invested capital after the SolarCity acquisition. We also see risk of major value destruction should EV adoption flop or occur much more slowly than any of our three 10-year forecast periods assume, or if the company cannot meet its volume targets. For that reason, we wait for now to award Tesla a moat, but we see a positive moat trend as a result of the strengthening of the firm's brand and its cost structure.
Although we stress the uncertainty in investing in Tesla today, the company's competitive position is better than some may expect from a tech startup that makes automobiles. Looking at our five moat sources, we see a case for brand (intangibles) and cost advantage as sources of a moat in the future. Some may argue for efficient scale, claiming that Tesla is the dominant pure EV firm. Although Tesla's long range gives it a huge advantage over pure EVs on the market (370-mile EPA range for the long-range Model S versus 259 miles for the Chevrolet Bolt, 226 miles for the Nissan Leaf, and 234 miles for the Jaguar I-PACE), we consider Tesla's competition to be the entire auto industry rather than just EVs. There are far too many automakers globally for us to claim Tesla's market is effectively served by a small number of players.
Musk's own words do not support efficient scale. He wrote in a June 12, 2014, blog post announcing that Tesla would not sue companies that use its patented technology in good faith: "Given that annual new-vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world's factories every day."
We are raising our fair value estimate to $326 from $231 per share. The change is from modeling much higher deliveries through 2028 to account for a sooner than previously guided launch of the Model Y crossover and our expectation of more consistent free cash flow generation going forward, though we think some quarters will burn cash during launches of new vehicles. We now model total deliveries over our 10-year forecast period of about 12.5 million from 9.4 million previously. We remain concerned about Tesla's debt load so if free cash flow becomes insufficient to service debt, we may raise our weighted average cost of capital. All else constant, that move would lower our fair value estimate to as low as $206. Tesla is a volatile name and fair value estimate changes may be frequent as its story changes. We add back about $3.9 billion of nonrecourse debt to our valuation. The midcycle operating margin remains 9% and includes stock option compensation expense.
We model 2019 vehicle deliveries of 370,000, 2020 deliveries of about 566,000, and nearly 950,000 in 2021. We model capital expenditures of $3.3 billion in 2020. When modeling Tesla in our discounted cash flow model, we keep an open mind regarding the disruptive potential of Tesla on the auto and utilities industry as well as focusing on what the company can achieve in 10 years. For a young company like Tesla, we think long-term potential is the more important question and value driver than how many Model 3s get delivered in a quarter, but tremendous uncertainty surrounds the story.
Management's long-term guidance since its 2010 initial public offering is for an operating margin in the low teens to midteens. The guidance is also non-GAAP, so it excludes stock option expense, whereas we include stock option expense in EBIT to capture the cost of diluting shareholders. Tesla's guidance is also much higher than typical mid-single- to low-double-digit automaker EBIT margins, but the firm has upside margin potential if it can reduce its battery costs and have a high-margin storage and autonomous ride-hailing business. We model $1.9 billion of energy revenue in 2019, with that figure growing to about $6 billion by 2028. This revenue is about 4% of our fair value estimate.
Investing in Tesla comes with tremendous uncertainties due to the future of electric vehicles and energy storage. If a recession hits, investors may not want to hold the stock of a firm whose story will not play out until next decade, or Tesla could fail to raise capital when it needs it. Until an electric vehicle far cheaper than the Model 3 goes on sale in mass volume, there is no way to know for sure if consumers in large volume are willing to switch to an EV and deal with range anxiety and longer charging times compared with using a gas station. Tesla is fighting a state-by-state battle to keep its stores factory-owned rather than franchised, which raises legal risk for Tesla and could one day stall growth. Other automakers are entering the BEV space. If the company's growth ever stalls or reverses, we would expect a severe decline in the stock price because current expectations for Tesla are immense, in our opinion. With a young, growing company, there is always more risk of diluting shareholders or taking on too much debt to fund growth. Tesla also has customer concentration risk, with the U.S. and China constituting about 78% of 2018 GAAP revenue, up from 56% in 2015.
We see immense key-man risk for the stock, as Tesla's fate is closely linked to Musk's actions. Should he leave the company or the SEC bans him from running Tesla, we would not be surprised to see the stock fall dramatically. Also, Musk has 13.4 million Tesla shares as collateral for personal debt. Selling this block of shares quickly may cause a rapid fall in Tesla's stock price. Tesla will soon have formidable EV competition from German premium brands it does not have today. It's uncertain if Tesla vehicle owners will also want solar panels and batteries in sufficient volume to justify buying SolarCity. Given the many uncertainties regarding investing in Tesla today, including our concerns on its debt load, our fair value uncertainty rating will remain very high for a long time.
We award Tesla a Standard stewardship rating. Musk is barred from holding the chairman role for three years following a 2018 settlement with the SEC on civil securities fraud charges. Tesla must also appoint two new independent directors. In December 2018, Tesla appointed Oracle founder Larry Ellison and Walgreens HR boss Kathleen Wilson-Thompson to the board to fulfill the settlement. Ellison is a fierce Elon cheerleader, so we doubt he will give Musk any headaches. In November 2018, Tesla named Robyn Denholm chairman. She has been on Tesla's board since 2014 and has experience both in autos with Toyota Australia in finance and in technology as CFO and COO of Juniper Networks and CFO of Telstra and time at Sun Microsystems. We like that she resigned as Telstra's CFO to focus full time on Tesla. We do not expect major changes in Tesla day to day and still think it is the Elon Musk show. Denholm's top priority in our view will be to keep Musk content and ensure he doesn't say anything to violate his SEC settlement.
We considered downgrading our rating after the all-stock offer to acquire SolarCity closed because the offer came about one month after Tesla raised equity and at the time there was no disclosure of a possible acquisition. The deal to acquire a firm led by two of Elon Musk's cousins (who have since left Tesla) after SolarCity's stock had fallen by 75% since early 2014 is not what we like to see. We left our rating in place, however, because there is a valid strategic rationale for acquiring SolarCity, which is to make Tesla a vertically integrated sustainable energy company.
Musk, 48, is synonymous with Tesla, and the stock could suffer should he resign. We doubt he will resign soon, however, because shareholders approved a new 10-year performance award in January 2018. The plan has aggressive market cap targets for Tesla's stock of up to $650 billion that are paired with 16 milestones focused on revenue and adjusted EBITDA targets. The revenue targets are as large as $175 billion and the adjusted EBITDA targets, which exclude stock-based compensation expense, are for as much as $14 billion. Up to 16 operational milestones may be paired with the market cap milestones for shares to vest. The market cap milestones start at $100 billion and go up in $50 billion increments afterward. As the board certifies each milestone, Musk receives one of 12 tranches of stock options. Each tranche is for about 1.69 million shares (about 1% of Tesla's outstanding shares) and has a strike price of $350.02. Musk must hold any shares he exercises for five years (which we like a lot), and there is no acceleration of vesting for a change in control.
It is also important that the plan gives clarity to Elon's status as CEO. We do not think he wants to be CEO forever, but he has said he will remain involved with Tesla for the rest of his life. This new award has vesting eligibility as long as Musk is CEO or stops being CEO to become executive chairman plus chief product officer. Musk has many interests beyond Tesla, so we expect he will not be CEO for the length of this award plan. Tesla has estimated in the past that should Musk receive all the shares, he would own 28.3% of Tesla. The plan is designed so that as Tesla issues more shares, the maximum value of the compensation, which Tesla estimates at about $55.8 billion, goes down. We see this plan as very rewarding for shareholders, should Tesla reach a $650 billion market cap. It's a plan that encourages massive growth in shareholder value over a long period and is done in a way that is easy to track with metrics reported in SEC filings. It also does not give Musk incentive to sell the company. Musk beneficially owns about 22% of the stock.
Musk is on the board along with his brother, Kimbal and many longtime connections of Elon's. In 2019, Tesla proposed to reduce its classes of directors to two from three, which would mean two-year terms instead of three years but the proposal failed because too many nonvotes led to no supermajority of outstanding shares for the affirmative votes. This proposal was a step in the right direction but we see the current board of nine members, which includes his brother, still friendly to Musk. We'd like to see the entire board up for election every year and more members with fewer ties to Musk.
Musk has arguably too much responsibility serving as Tesla and SpaceX CEO, plus running the Boring Company and artificial intelligence plans, which raises the risk of him being pulled in too many directions. Directors and officers own over 20% of Tesla's stock, so Elon's interests are aligned with Tesla's shareholders, but other shareholders are essentially along for the ride. Tesla has various related-party transactions with SpaceX or The Boring Company for aircraft, battery components, and other equipment, but we see no alarming transactions in the proxy statements.
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