Tesla Inc. continues to lose money as it sells more cars. On Wednesday, the electric-car company announced a second-quarter net loss of US$408 million.
Tesla bulls say that’s a welcome improvement compared with losses of more than US$702 million in the previous quarter and US$742 million in the second quarter of 2018. To Tesla bears, it shows the company can’t earn annual profits under its current structure and business strategy. Tesla’s share price dropped 11 per cent in after-hours trading.
The company delivered a record 95,200 cars in the second quarter, on the strength of its Model 3 compact sedan. That topped the previous record of 90,966 cars in the fourth quarter of 2018.
Although it sold more cars this time, Tesla’s revenue was lower: US$5.3 billion, compared with US$6.3 billion in the fourth quarter.
That’s because Model 3s carry a lower price — and profit margin — than older-model S and X vehicles, and Tesla has cut prices of all models.
The price cuts are evidence that Tesla has a demand problem, said Mark Spiegel, whose Stanphyl Capital hedge fund is betting the company’s stock price will dive. "Any thinking person knows you don’t cut prices on your product unless you have to," he said.
Unless costs are also falling, price cuts will reduce profits. With a high overhead that includes auto and battery factories, a car-charging network and company-owned sales and service centres, Tesla has found serious cost cutting to be a challenge. And its stock price, though hit hard this year, is still priced as if investors expect massive profit growth.
Pricing will remain under pressure as federal subsidies run out for Tesla buyers. Starting July 1, the federal tax credit for Tesla fell to US$1,875 from US$3,750. A previous cut in the subsidy amount in January, from US$7,500, dragged down sales and profits in Tesla’s first quarter. Tesla’s subsidy will disappear in January unless Congress renews it. In the meantime, buyers of electric cars from Jaguar, Audi, Mercedes-Benz and others still quality for the full US$7,500 rebate.
"If the price you’re charging for your product is dropping faster than your cost of producing that product, there is no way you can switch from losing money to making money," Spiegel said.
But Tesla bull Ross Gerber, head of the Gerber Kawasaki investment-management firm in Santa Monica, Calif., sees Tesla making progress on costs. He prefers to see Tesla’s high levels of management turnover not as a problem, but as an opportunity for chief executive Elon Musk to promote better managers.
"Tesla was so poorly run a few years ago, but the amount of cost benefits they’re getting under Jerome Guillen is remarkable," Gerber said.
Guillen, a former Daimler executive who had been running Tesla’s semi-truck project, was put in charge of the company’s Fremont, Calif., auto factory last year. That came after an extreme attempt to automate Model 3 production that went awry. As robots were ripped out, Guillen redirected Model 3 assembly through a giant tent, which drew hoots from critics, but stabilized production.
But costs are hardly the only issue. Even while overall customer satisfaction remains high and positive reviews flow from auto-enthusiast magazines and websites, Tesla continues to struggle with quality problems and customer complaints about service. If not fixed, those problems probably would limit demand.
Wednesday’s Tesla announcement isn’t the last word on second-quarter results. The company’s government filing will be released in coming weeks. In the past, Tesla has included details on revenue and profits that didn’t appear in its original announcements, such as cash received from selling clean-air credits to other automakers.
Musk can keep his Tesla dream alive and still lose money, as long as capital markets keep funnelling cash his way. This year, Tesla has raised US$2.7 billion in equity and debt.
— Los Angeles Times