Tesla Is Profitable: Now What? by Ben Zeisloft W'22

On October 24, Tesla (NASDAQ:TSLA) surprised investors by announcing a profitable quarter—the third such quarter in the company’s fifteen-year history.

Tesla’s Quarter 3 update letter boasted a Generally Accepted Accounting Principle (GAAP) net income of $312 million and a non-GAAP net income of $516 million. Its predictions for Quarter 4 were optimistic: “We expect gross margin for Model 3 to remain stable in Q4 as manufacturing efficiencies and fixed cost absorption offset a slightly lower trim mix and the negative impact of tariffs from Chinese sourced components.” Tesla’s Model 3 electric vehicle was the primary driver of profitability.

Experts, however, are divided on the future of Tesla. Five of Wall Street’s major analysts (Morgan Stanley, Baird, Oppenheimer, Piper Jaffray, Guggenheim) suggest buying shares, eight (Goldman Sachs, Bank of America Merrill Lynch, J.P. Morgan, UBS, Citi, Barclays, Needham, Cowen) advise selling, and five (RBC, Evercore ISI, Nomura Instinet, Canaccord Genuity, Jefferies) recommend holding.

From Morgan Stanley, Adam Jones says that "historically, Tesla has beat expectations on 1 or 2 line items while missing on profit or cash flow. This quarter was different... In our opinion, one of the most important debates for Tesla is when they can become self-sufficient on free cash flow, reducing the need to tap the equity market.”

On the other hand, Goldman Sachs’s David Tamberrino questions if “this is not as good as it gets from a near-term upside surprise for shares. The company has maintained that it designed and built the Model 3 with a target 25% gross margin and almost achieved that this quarter (albeit with a rich mix). However, with its own exposure to China tariffs on imported components and likely headwinds to mix as lower price point vehicles are offered, automotive gross margins likely compress sequentially into 4Q18 – and could see further mix pressure into 2019 as the US Federal Tax Credit begins to phase out for its vehicles.”

In the short-term, Tesla’s profitability bodes well for the company. In August, shares dropped 14% after CEO Elon Musk tweeted his intention to take Tesla private—a move that violated SEC regulations. Although the stock price is recovering from the controversy, Tesla will face heightened competition from fellow automakers in the near future.

The Nissan Leaf and Chevy Bolt already compete with Tesla’s vehicles for market share in the electric car space. Other automakers intend to enter the electric car market as well—BMW in 2019, Volkswagen and Ford in 2020, and Subaru in 2021. Additionally, British vacuum manufacturer Dyson announced in late October that it intends to introduce its own electric vehicle by 2020.

In his August 24, 2018 letter to Tesla shareholders, Musk asserted that the company will   “continue to focus on what matters most: building products that people love and that make a difference to the shared future of life on Earth.” A unique product experience and environmental mission will be crucial to Tesla’s growth as it retains its customers, faces critics, and fends off competitors.