The future of Tesla hinges on the Model 3, the lower-priced sedan that Elon Musk wants to sell in large numbers. The company has to both build them fast enough and making a profit doing it. Fail at either one, and the company will struggle and eventually sink.
A month ago, the company gave production numbers for the second quarter of the year, and said it had finally met an oft-pushed-back target of building 5,000 Model 3s in a week. So that’s one box checked.
Today, though, Tesla released its financial statements for the same quarter, and revealed the biggest loss in the company’s history: $717 million. But that was balanced by some good news: $2.2 billion in cash reserves, which is higher than many analysts were expecting, and means there’s money on hand to keep building without borrowing more.
Cash burn is not necessarily a bad thing, if the money is being invested in a way that will lead to future growth and profit. When a company is ramping up production of a new product, it’s expected to invest a lot in machinery, supply lines, and staffing, often using borrowed money. But that can’t go on forever, which Musk acknowledges. He doubled down on a promise to be profitable toward the end of this year, and then to keep the cash coming in. “Our goal is to be profitable and cash flow positive for every quarter going forward,” said Musk today on an earnings call, working hard to convince investors he can check the second box too.
On the last earnings call Musk called investors’ questions “bonehead,” and “dry,” after which Tesla stock dropped about 10 percent. Today, Elon Musk was restrained and contrite. He apologized for sounding tired (“I’ve been working like crazy in the body shop lately”), and more significantly, he apologized for being “impolite” to investors three months ago.
Tesla has yet to deliver a $35,000 Model 3, the supposedly affordable model. All variants so far have been high spec, including bundled options like a premium interior. And Tesla recently started taking orders for an even more extreme, high-performance version that will cost at least $64,000, instead of focusing on the cheaper car.
That’s a disappointment for anyone waiting for an affordable Tesla, but this focus on the high-end vehicles is allowing the company to make a profit on them, which will keep investors happy. Just a small profit per car in Q2, Tesla says, without being specific, but it’s expecting around 15 percent profit margins in Q3. So far, so good, but Tesla will have to figure out how to continue to make a profit on each car, when it’s selling them for half as much.
Another issue when it comes to sales is that the federal tax credit of $7,500 for buying an electric car is starting to phase out for Tesla, now that the company has hit the milestone of 200,000 vehicles. Cars delivered before the end of the year will qualify, then the credit gets cut in half for six months, then half again, before finally disappearing at the end of next year. That could potentially put it at a competitive disadvantage, as other manufacturers scale up their electric offerings. (The Jaguar I-Pace, Audi e-tron, and Porsche Taycan, are all due to go on sale within the next year, and will all quality for the tax credit, for example.)
The 5,000 Club
Tesla also looked to reassure shareholders that the rate of 5,000 Model 3s per week wasn’t a fluke, or the result of impossible-to-sustain overworking. “During the month of July, we have repeated weekly production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X per week,” its update letter says.
Although Musk is famous for setting bold, and probably impossible, targets, often on Twitter, Tesla is more restrained in the formal update, saying it is aiming for 6,000 Model 3s per week by the end of August, and 10,000 per week sometime next year, once it’s sorted out every issue on the production lines.
Musk originally promised a Tesla would drive itself coast-to-coast by the end of last year, but that never happened. Instead the company has had to handle headlines questioning the safety of Autopilot after a series of crashes, including an impact with a highway barrier in northern California that killed the driver, in March. Today Musk said the Autopilot team has been focused on safety issues, but will be pushing out the latest software update to vehicles with some “really cool features” by September. He didn’t give details on what that means, but in the past he’s promised more semi-autonomous tech, like auto lane changing, allowing on-ramp to off-ramp driving on freeways, with minimal human input.
On today’s call, Musk said the Autopilot team might be able to pull off a coast-to-coast by the end of this year, but it’s the only flashy claim he made. Musk sounds like he’s learning from his experiences in scaling up his car company. “Start simple and get fancy later,” he now says about building a factory.
Being nice to investors, and holding back from grand promises is a new approach for Musk, but it’s one that seems to be working. The share price is up, Model 3 production is increasing, and the company is on the verge of making money. Check, check, and check.