Tesla earnings report: How Tesla’s third quarter went right

Tesla’s stock soared more than 9 percent Thursday following news that the electric-car maker just turned in a profitable quarter.

In reporting income of $417 million on $6.8 billion in revenues, the normally money-losing company delivered on one of CEO Elon Musk’s key promises. It also surprised Wall Street, whose analysts predicted Tesla would have a small loss.

“They have a long history of overpromising and underdelivering. It appears they’re now delivering,” said CFRA analyst Garrett Nelson, who upgraded his rating on Tesla shares from “hold” to “buy.” “This was the breakthrough quarter where they’re now showing significant improvement.”

Here are the four major areas in which Tesla has made strides:

Fixed production problems

Six months ago, Tesla was struggling to produce 2,000 Model 3 sedans a week while Elon Musk slept on the factory floor. Those issues put in doubt the company’s future, which hinged on its promise to mass-produce the Model 3, a relatively affordable electric sedan, on a large scale.

In the just-ended quarter, the company has more than doubled those production figures, now moving an average of 4,300 cars a week off the assembly line. According to Tesla, the amount of production hours needed to make the Model 3 dropped by nearly a third. It also seems to have moved on from intermittent delivery problems it experienced in September.

Made cars more cheaply

Between this year’s second and third quarter, Tesla shaved $10,000 off the costs of making a car — thanks to a lower cost of raw materials as well as fewer work hours spent on each car. Many on Wall Street expect those figures to improve even further.

Part of the story is Tesla’s integrated manufacturing model. In addition to its auto assembly plant  in Fresno, California, Tesla owns the Gigafactory in Nevada, where it produces car batteries. This “creates a significant barrier for competition and … should be a competitive advantage for TSLA over the long term,” Ben Kallo, senior research analyst at Baird, wrote in a note using Tesla’s stock ticker rather than its name.

Over time, economies of scale will make battery-pack assemblies even cheaper and improve Tesla’s profitability, Kallo predicted.

Gained popularity

The Model 3 sedan became one of the most sought-after cars in America last month, outselling all but four models of Japanese sedans. The luxury Model S outsold Mercedes. That level of popularity was a major factor behind the reversal of a major Tesla short-seller this month (short sellers bet that a stock’s price will fall).

“The story has become too compelling to ignore,” Andrew Left of Citron research wrote on Friday. Not only is Tesla effectively reducing its backlog, with some customers receiving cars they had awaited for two years, it’s pulling away customers from competitors.

“Consumers are coming up for lease renewal or new car decision and opting into a Tesla — it is not just pent up demand,” Left wrote.

Shared the limelight

The normally flamboyant Musk let Tesla’s results do the flame-throwing this time and held a thoroughly uneventful conference call. He invited Tesla senior executives to discuss the results and politely refrained from insulting analysts.

But even if he were to revert to his old ways, Musk likely wouldn’t present an existential threat to Tesla. That’s because the Securities and Exchange Commission finally took notice of his erratic behavior and forced a settlement in which Musk agreed to cede some of his leadership powers. He remains CEO but is stepping down as chairman of the board and bringing on two new board members.

Those changes will ostensibly increase the amount of supervision he receives — leaving him more free to focus on the product.