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Two months ago, we tried in a rudimentary way to determine how Tesla would become profitable in the third quarter of 2018.
Using nothing other than an Excel spreadsheet, Tesla's advice and a rough modeling, we came to the conclusion that, with the exception of a miraculous move in the gross margins of model 3, beautiful beautiful difficult for Tesla to go into the dark.
By informing us last week of Tesla's deliveries for the third quarter, we felt it was high time to dust off the FT Alphaville Tesla Q3 profit generator, plug in the new numbers and determine whether this new point of data had moved the needle.
First of all, here is our model from the last time (the complete exploder, filled with tortured assumptions, can be read here):
Let's start with the crucial delivery number for model 3.
We initially estimated 60,000 cars delivered, based on 11,166 vehicles in transit at the end of the second quarter, as well as Tesla's forecasts in the earnings press release.
It seems like we were a touch. Tesla eventually delivered 55,840 models 3, 7% less than expected. But with what price? From last week's bail:
Our third quarter model 3 deliveries were limited to higher priced variants, cash / loan transactions and North American customers only.
So, not much more to continue here. In our model, we estimated the average selling price at 65,000 USD, which is the average price of 3 high end models. So we will stick to that. Multiply by the number of shipments and, hop, you get $ 3.6 billion in revenue.
Repeat the operation with the 27,660 deliveries of Model S and Model X at an approximate asking price of $ 104,000, add it to the combination with $ 644 million in energy and services, and our balloon 8-ball magic shows that the top Tesla line yielding just under $ 7.2 billion in sales this quarter.
All things being equal, it seems like another red quarter for Tesla:
A loss of $ 274 million, a little more than our first estimate of $ 209 million.
Save on cost reduction, Model 3's gross margins seem to be decisive for this quarter or for the Tesla Group.
We initially had an 11% gross margin, noting that Model 3 had a negative gross margin in the second quarter. comprising non-cash items and given lingering break-in problems at Tesla's Fremont factory – perhaps it would be better encapsulated in a production line housed in a giant tent – this figure does not seem particularly unfair.
But suppose Tesla has fixed some production problems, bringing his gross margins closer to 15%, which Musk could do at the last teleconference.
That would take the gross profits of Model 3 from $ 399 million to $ 544 million – a piece of decent change, but not enough to push Tesla into the dark:
As stated, Tesla could also save money by controlling its operating costs. However, even if research and development and sales expenses, as well as general and administrative expenses remained stable instead of increasing, the result would still be a deficit of $ 28 million:
Another question is whether such cost control is possible with revenues close to double over three months.
For example, the logistics of delivering 83,500 cars was clearly difficult for Tesla, but it should have been resolved in this way in advance, given the ramp-up of Model 3 production in the past year. past year.
Unfortunately, this was not the case as several media outlets documented Tesla's problems with passing cars to customers. Even two weeks after the end of the quarter, Musk was still referring to "the hell of logistics" on Twitter:
Sorry, we went from production to delivery logistics, but this problem is much easier to solve. We are making rapid progress. Should be resolved shortly.
– Elon Musk (@elonmusk) September 17, 2018
Given the administrative infrastructure needed to efficiently organize the shipment of 80,000 cars, it is unlikely that operating costs will remain stable, much less decrease.
Reducing research and development costs seems equally unlikely. First of all, if Tesla's research and development expenses were to decrease, what would that indicate as to the future of the "extremely exciting product set" that Musk mentioned during his teleconferencing? Of course, the valuation of Tesla is not only based on the success of model 3, but also on the promises of the electric semitrailer, the Y model, the next-generation Roadster and its autonomous technology.
For example, Macquarie Investment Bank initiated a Tesla hedge on Monday with a price target of $ 430 (shares closed on Tuesday at $ 262.80), highlighting its technology advantage. self-driving:
We believe that potential winners will be those who will focus on extremely disruptive ecosystem platforms, including the necessary path to electricity and autonomy. We believe that Tesla occupies a unique position due to its leading role in the integration of the software platform into its electric vehicles and its positioning as an autonomous, with over 8 million kilometers of actual driving data per day.
Similarly, at Berenberg, brains believe that the market "underestimates the full reach of Tesla's technological advantage. . . which manifests itself in the overall electronic architecture of the vehicle as well as in the battery management system ". It has a price target of $ 500 on the stock.
It is therefore unlikely that Tesla will reduce its spending on R & D. Unless, of course, he believes that his technological advantage is unassailable. An idea that does not contradict Consumer Reports 'first ever published ranking of partially autonomous driving systems, released last week, putting the Tesla autopilot in second place behind General Motors' Super Cruise. Looks like Detroit still has some tricks in his bag.
So back to our model and it's hard to understand how Tesla can make a profit this quarter, even with gross margins of 15% for Model 3:
To be honest, we are not sure if Tesla still thinks this quarter will be profitable either.
Just look at the third quarter earnings and cash flow statement in the second quarter press release:
We also reaffirm our expectations for net earnings and GAAP net cash flows in the third and fourth quarters, despite negative pressure from a weakening of the US dollar and a likely increase in Canadian customs duties. vehicles imported into China and components purchased from China.
By the third quarter:
Our net income and cash results will be announced with the rest of our financial performance as we announce third quarter results.
Hmmm.
Related links:
Tesla: Achieving Third Quarter Profitability – FT Alphaville
Calling all the bad guys Suburban Bond – FT Alphaville
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