21 August 2019
Tesla CEO Elon Musk is under intense pressure to prove he can deliver consistent production numbers for the new Model 3 sedan. Photo: Bloomberg
Tesla CEO Elon Musk is under intense pressure to prove he can deliver consistent production numbers for the new Model 3 sedan. Photo: Bloomberg

Tesla buoys profit hopes as Model 3 production stabilizes

Tesla said it will produce its new Model 3 sedan at a profit as output stabilizes, buoying hopes that the electric vehicle maker will stanch its financial losses in the second half of the year, Reuters reports.

Chief executive Elon Musk is under intense pressure to prove he can deliver consistent production numbers for the sedan, Tesla’s lowest-priced model and the key to its plans to become a mass-market automaker.

Tesla reported a record loss that doubled to US$718 million in the second quarter, but its shares jumped as much as 11 percent in after-hours trading, as investors focused on steadier production volumes and a slower rate of cash burn.

That puts it on track to retake the title of most valuable US automaker from General Motors Co.

The company cut its capital spending plans and said it would not hit its long-term rate of producing 10,000 Model 3s per week until next year, trading off production ramp speed for financial health.

“We like the more muted tone of the company’s outlook, with the absence of unnecessary new stretch goals,” CFRA analyst Efraim Levy said. “Perhaps it reflects a more cautious Elon Musk.”

The outspoken Musk, who told analysts last quarter that he refused to answer their “boring” questions, apologized multiple times on Wednesday during a post-earnings call for his past behavior.

Tesla said that during July it had hit an earlier goal of building about 5,000 Model 3s per week “multiple times”, and reiterated a target of producing 6,000 per week by late August. Analysts have questioned whether the 5,000 rate would be sustainable.

It expects to build a total of up to 55,000 Model 3s in the third quarter, which works out to an average weekly rate of 4,230, at a roughly 15 percent gross margin, rising to 20 percent in the fourth quarter.

Tesla delivered its 200,000th electric car – including its more expensive Model S and X vehicles – in July, a threshold which means a US$7,500 federal subsidy will remain in place to the end of the year.

Had it delivered the car in June, the subsidy would have lapsed a quarter earlier.

Thus far, Tesla has only produced higher-cost versions of the Model 3, starting at about US$49,000. But Musk said many of the trade-ins it received were mass-market vehicles, including the Toyota Prius and Honda Accords and Civics.

Tesla recently opened up reservations for the Model 3, allowing new buyers of the pricier models to jump ahead of those who had ordered base models of the vehicle two years ago.

That angered some deposit-holders, and analysts questioned whether more would drop out because of delays making the cheaper US$35,000 version.

Cash flow positive

Wall Street analysts have also questioned whether Tesla would need to raise more cash, but Musk said on the call that he expected the company to be henceforth profitable and cash flow positive, excluding some debt repayment, and had no plans for an equity raise.

Tesla plans to pay off its upcoming debt – some US$1.8 billion comes due before November 2019 – through internally generated cash flow, Musk said.

Tesla ended the second quarter with US$2.78 billion in cash after spending US$610 million in capital expenses.

Free cash flow, a key metric of financial health, narrowed to negative US$740 million in the second quarter from negative US$1 billion in the first quarter, excluding solar business costs.

Tesla has begun to lay off 9 percent of its workforce as it tightens spending. Tesla said its capital expenses would be slightly below US$2.5 billion in 2018, less than last year’s US$3.4 billion.

The company also outlined expansion plans, saying it would likely announce the location of a European factory this year and planned a Shanghai, China plant to produce both vehicles and batteries.

Tesla’s China investment would not start “in any significant way” until 2019, with much of the roughly US$2 billion cost to be funded via local debt.

Excluding items, Tesla reported a loss of US$2.45 per share, compared with expectations of a loss of US$2.92.

Total revenue rose to US$4 billion from US$2.79 billion.

Shares rose in after-hours trading to around US$328. The stock has slumped 19 percent since a 2018 high of US$370.73 in June.

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