The question from an analyst perspective has alway been “can Tesla make a profit on a $35,000 Model 3?” Musk’s morning blog post clearly implies the answer is “no,” and that puts Tesla’s very future–to say nothing of the $60 billion market capitalization the company was afforded yesterday–at risk
Mix is margin. That old auto analyst mantra was running through my head as I read Elon Musk’s blog post on Tesla’s investor relations site this morning. Freed from the constraints of a traditional press release Musk can multi-task with these posts, and this one was clearly meant as both a fourth quarter profit warning and a layoff notice for the 7% of Tesla employees that now face the sack.
Musk indicated that preliminary results show that Tesla’s third quarter 4% profit margin would not recur in the fourth quarter. The $255 million profit underlying that margin –actually 3.7% on a after-tax basis–included $189 million in revenue from selling tax credits (ZEV and non-ZEV) to other carmakers, so I never viewed 4% as a sustainable level of profitability for Tesla. Musk seemed to confirm that in his blog post today.
Credits aside, Tesla delivered many more cars in the fourth quarter than in the third (90,700 vs. 83,775) and today’s profit warning clearly shows that Tesla’s profit per car dropped dramatically in the December quarter. Musk further predicted a “tiny” margin for the first quarter of 2019, as Tesla sells more of the lowest-available spec model of the Model 3, which currently retails for $44,000 in the U. S.
FILE – In this Jan. 9,2019, file photo, Tesla CEO Elon Musk speaks during a meeting with Chinese Premier Li Keqiang at the Zhongnanhai leadership compound in Beijing. Electric car and solar panel maker Tesla said Friday, Jan. 18,2019 it plans to cut its staff by about 7 percent. (AP Photo/Mark Schiefelbein, Pool, File) ASSOCIATED PRESS
There will be endless parsing of Musk’s words today–as there always is–but it seems to me that Musk was predicting a net margin cadence of 4%-2%-1%, and my back of the envelope calculations show those figures to be reasonable.
That margin decrement would indicate that the benefits of scale are not occurring at all at Tesla, and that is a virtual death blow to the bullish arguments for the stock.
