Tesla’s latest earnings report comes in a profitable shade of black

Finally, a car that makes money.
Finally, a car that makes money.
Image: REUTERS/Mike Blake
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Tesla turned a quarterly profit for the third time in its 15-year history.

In April, CEO Elon Musk tweeted that the electric carmaker would be in the black for the rest 2018. In today’s (Oct. 24) earnings report (pdf), the company achieved that milestone for its third quarter, recording net income of $312 million despite logistical and manufacturing challenges. Tesla says it hit its efficiency targets, trimming labor hours for Model 3 manufacturing by more than 30% over the prior quarter.  The stock jumped 8% in after-hours trading.

“We can be positive cash flow and profitable all quarters going forward,” said Musk during today’s earnings call (he left an exception during quarters requiring large debt repayments).

This marks a turnaround in a brutal year for Musk. In September, he was sued by the US Securities and Exchange Commission (SEC) for fraud over comments he made on Twitter about taking Tesla private. Although the case was settled, he had to step down as chairman and pay a $20 million fine. His public feuds with Wall Street analysts, and a cave diver he baselessly called a pedophile, tarnished his reputation among investors. That’s on top of antics such as smoking pot during an on-camera interview.

Despite Musk’s erratic performance, Tesla is finally proving it can be a “real car company,” as Musk told his employees in July. The turnaround is drive by surging production of the Model 3, which is winning over customers and critics. The Model 3 was the best selling electric car in the US during the third quarter, and the fifth best selling sedan overall. Tesla managed to ship more than 80,000 cars overall in the most recently completed quarter. Together with the Model S and Model X, Tesla holds three of the top four spots for best selling electric cars.

That helped power Tesla’s profits as the carmaker delivered 55,840 Model 3s this quarter generating more than $3 billion in revenue, three times the previous quarter. While the car’s average sticker ($59,000) price is not yet the $35,000 Musk promised, the price is dropping. In October, Tesla rolled out a $45,000 mid-range version of the Model 3 (or $34,200 after gas saving and federal tax incentives). A recent teardown by automotive consulting firm Munro & Associates suggested the Model 3, after overcoming serious quality issues earlier in the year, could deliver a 30% profit margin for Tesla, an unprecedented achievement for electric vehicles. Tesla said it expects the Model 3 to hit profit margins of at least 20% by the end of 2018.

“The third quarter in many ways serves as Elon Musk’s redemption—you may not agree with his approach, but you can’t argue with the numbers,” says Jeremy Acevedo, manager of industry analysis at Edmunds, which said Tesla has accounted for 76% of pure electric car sales in 2018.

Even skeptics are being won over. Just before the earnings report, JMP Securities rated Tesla shares as outperforming the market with a buy recommendation. Andrew Left of Citron Research, one of Tesla’s most vocal short sellers, is now bullish on the company. Left had expected a flood of competing electric vehicles to have arrived from major automakers by now, but most are several years away from delivering a true rival to the Model 3 or matching its software prowess. “Tesla appears to be the only company that can actually produce and sell electric cars,” Citron wrote (pdf). “Tesla is dominating the industry with no advertising, no unions, no dealer network.”

Tesla still has plenty of challenges in front of it. It had to trim 9% of its workforce and restructure parts of the company this summer to pare down expenses and streamline operations. Billions of dollars will be needed to fulfil Musk’s promise of building three more Gigafactories in the US, Europe, and China, such as the $2 billion factory near Shanghai expected to churn out 250,000 vehicles once complete. Musk must also manage Tesla’s mounting debt load (up to $11.6 billion) while keeping his promise not to raise new capital.

Tesla now has a bright red bullseye on it from the rest of the car industry. GM and Ford both have about 10 times more cash than Tesla’s $1.3 billion on hand (after subtracting customer deposits), reports Reuters. As most automakers plan to electrify their vehicle lineup in the coming years, Tesla won’t have the market to itself forever. Then we’ll see if Tesla’s head start is enough.