Tesla Earnings: Key Takeaways and Analysis

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PALO ALTO, California; Oct. 24, 2019 /TheStockDork/ — Tesla (TSLA) just pulled another rabbit out of its hat. Tesla earnings silenced the doubters with a profitable quarter and a confirmation of its ambitious 2019 delivery targets.

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Tesla posted a surprise profit in the third quarter and set a record for Model 3 deliveries. Above: A Tesla vehicle on display.

The Numbers

Consensus estimates predicted Tesla would post a quarterly loss of $0.48 per share. The actual numbers beat forecasts by a wide margin, Tesla posted a quarterly profit of $0.78 per share. Last year, during the same quarter, Tesla posted a $1.75 per share profit. Revenues fell to $6.3 billion in the third quarter from $6.82 billion a year earlier

Sales Numbers Mixed

Record highs in Model 3 deliveries helped fuel the beat. CEO Elon Musk said the company made “great strides in controlling costs“. Model 3 comprised roughly 82% of the 97,000 vehicles delivered during the quarter.

“Our operating cost is now the lowest level since Model 3 production started,” said Musk.

Despite climbing Model 3 deliveries, sales of higher-priced models declined. The Tesla Model 3 is less than half as much as the company’s premium vehicles. Model 3 is Tesla’s mass-market model, so it’s no surprise that it’s leading the sales pack. However, declining sales in other segments is a reason for concern.

Improved Efficiency

Tesla earnings reported that the company improved its gross margins substantially by cutting manufacturing and material-related costs. The company is working to bring the Model 3 down to a $35,000 price tag, but it hasn’t been easy. As of now, the Model 3 sells for roughly $39,000 on Tesla’s website.

Operating expenses decreased by about 16% from last year’s totals. Tesla’s CFO cited “improvements in labor hours per vehicle” as the biggest contributor to the company’s improved margins, as well as improved efficiencies in logistics, warehouse, and delivery operations.

Profitability On Shakey Ground

The company’s track record for consistency isn’t great. Analysts are already asking how long this bout of profitability will last. Tesla said it expects to remain profitable, but warned that new product launches could pressure its margins.

Lofty Goals

The report marked the second consecutive quarter of record-breaking delivery numbers. Tesla reaffirmed its 2019 delivery forecast at 360,000 vehicles. That number sounded a little crazy a few months ago, but it’s starting to look like a realistic target. Tesla needs to deliver 104,800 vehicles before the end of the year to meet its delivery forecast.

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Demand for new Tesla’s could decrease after U.S. tax credits for electric vehicles are terminated next year. Above: A driver uses the auto-pilot function in a Tesla vehicle.

Eyes on China

Production trials for the Model 3 began at Tesla’s new facility in China – the world’s largest auto market – during the quarter. The facility is also scheduled to produce the Model Y compact SUV, which is expected to launch next summer.

The opening of the facility comes at a difficult time. Chinese auto sales are slumping, and overall demand appears to be weakening across the globe.

Growth Strategy

Tesla wants to produce limited quantities of its new, electric semi-truck next year. The truck is an exciting addition to the lineup, so it will be interesting to see how it performs and whether Tesla will expand the program. The truck was first introduced in 2017, but only very limited quantities have been produced since then.

Additionally, the company will launch its new compact SUV, Model Y, in 2020. Tesla is preparing for Model Y’s launch. Last quarter, the company began outfitting its facilities to produce the new vehicle.

As mentioned earlier, Tesla is driving hard for the Chinese market, but the firm’s international intentions don’t end with the People’s Republic. The company plans to open a new production facility in Europe and plans to announce the location of the new factory before the end of the year.

Challenges

Things aren’t going to get any easier for Tesla in 2020. Federal electric vehicle tax credits are scheduled to be terminated next year. The tax credit was a big incentive for U.S. customers. It’s been decreasing periodically for years, but next year it will be taken off the table entirely. Some analysts fear demand could weaken significantly once the tax credits are eliminated.

The global economy is slowing, and it appears that U.S. economic growth is stalling in some sectors as well. The trade war has greatly eroded consumer confidence and business sentiment. Demand for new vehicles is weakening in Europe and China, and that’s where Tesla is focussing its international expansion efforts. Most of the global economy is creeping towards a recession, so it’s questionable whether Tesla’s global growth strategy will pay off.

Slowing demand for Tesla’s premium models is a concerning sign. Premium vehicles often have higher margins than base models, so it’s possible that weakened sales of higher-priced models will pressure already-fragile Tesla earnings. Tesla’s new vehicles could generate some interest next year, but whether they will be able to carry profits remains to be seen.

Closing Thoughts

As usual, Tesla earnings were a mixed bag. The report checked all the right boxes and made for some pretty headlines, but the complete picture is more complicated. Kudos to Musk for delivering a profitable quarter and silencing the haters, but this company seems to be a long way away from sustainable profits. Investors hold Tesla for its growth potential, so contracting revenues is concerning. Between a slowing economy and terminating tax credit, continued demand for new Tesla’s is far from certain.

Shares popped over 20% when this news first broke but, as of now, they are pulling back from their highs. I expect this stock will come back to Earth some over the next few weeks. If you’re looking to get in, consider holding off until you see whether the stock will hold at its new price.

Chris Dios is an American writer and entrepreneur based in the Greater NYC area.

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