Tesla TSLA Upgraded to BB+ by S&P Global Ratings on Solid Demand Prospects & Robust Financial Metrics

Image: Vitaliy Karimov

Tesla has shown strong performance in Q3 2021, which has led to a big positive change for investors. S&P Global Ratings raised its issuer credit and issue-level ratings on Tesla to 'BB +' on solid demand prospects and robust financial metrics.

"Tesla Inc.'s earnings and cash flow in recent quarters has outperformed our expectations and demand prospects appear robust globally, especially with its ongoing expansion of production in China, Germany, and the US," wrote S&P Global Ratings, raising its issuer credit and issue-level ratings on Tesla to 'BB +'. "The positive outlook reflects our view that Tesla's free operating cash flow (FOCF) generation will remain positive more consistently, even as the company expands its global manufacturing footprint over the next 12 months," S&P continued.

Despite short-term supply problems for the industry, S&P expects Tesla's deliveries and profits to remain strong over the next few quarters. Despite semiconductor shortages and other supply bottlenecks, Tesla has kept production disruptions to a minimum compared to most automakers. According to S&P, this will support its strong revenue and earnings growth in 2021. At the end of Q3, the company reached an annual production level of 1 million units, which they believe is an important milestone.

EBITDA margins for Tesla remained strong so far this year; S&P expects margins to remain steady in 2022, despite some mix shift towards lower-priced vehicles i.e., Model 3 and Y relative to the higher-priced Model S and X.

The company continues to improve performance, improve production efficiency and make progress in its global expansion, so in its latest forecast, S&P expects Tesla to deliver more than 900,000 units in 2021, with a substantial increase to 1.2-1.5 million units during the next 18 months.

The agency expects further improvements in efficiency, cost, and technology as Tesla builds on the lessons learned at its Fremont, California factory. In addition, the company reported progress at its Shanghai factory, where production continues to expand. Tesla is also ramping up capacity for the Model Y at its factory in Berlin, Germany.

Autopilot and Full Self-Driving (FSD) technologies could become important competitive advantages as Tesla continues to make progress developing its FSD computer and remotely updatable artificial intelligence software, according to S&P.

The index believes that, to sustain recent strong growth, hold its first-mover advantage, and maintain market share, the company has to expand its range of products and make EVs more affordable with regard to the total cost of ownership, including insurance and service costs.

"Equity share sales throughout 2020 boosted Tesla's liquidity and substantially curtailed the company's financial risk. The company's early settlement of $1.8 billion senior notes (due 2025) in its third quarter was another credit positive. We expect cash on the balance sheet to exceed $15 billion at the end of 2021. As a result, Tesla's net debt continues to be zero. With more cash on its balance sheet than total debt, the company appears easily able to fund its global expansion. Moreover, this cushion of cash will help the company navigate through the near-term supply bottlenecks."

S&P wrote that it could consider an upgrade to investment grade if the company remains on a trajectory to sustain automotive EBITDA margins above 18% (excluding regulatory credits) as its Berlin and Austin production facilities come online. The index would also expect Tesla to exceed 1.5 million units delivered by 2023 to avoid a meaningful loss in market share amid intensifying competition and aggressive launches by automakers globally, particularly in China and Europe.

H/T @SawyerMerritt/Twitter

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