When you have lost money 11 years out of 11, with a 12th being a virtual certainty, taking a quarter off from losing once in a while can really excite some people.
You know that a company is popular when you can spend your first 12 years losing money each and every year and a lot of people remain fairly optimistic about it. The mere fact that a company could manage to keep things together all this time is a pretty amazing feat, and even Tesla’s harshest critics need to grant them that.
As a rule, we stick with companies when they are losing money because we expect that they will be able to eventually scale up their operation so that their fixed costs become a low enough percentage to finally be able to make consistent profits. When you scale up both production and losses, this is truly concerning and we may wonder what it would actually take to get in the black finally.
It’s not that Tesla hasn’t been making any headway, and one of the things that has really held them back is that their cars have been so expensive and therefore out of reach price-wise for most people. This can pin you against the wall where you need to sell a lot more cars but the market for very expensive electric cars may not be sufficient for you to achieve your business goals on the scale you want to.
Tesla’s Model 3 sought to address this problem and take better advantage of the great number of people who want to buy their cars but cannot afford them. The Model 3 is by no means an inexpensive car and still comes with a sticker price well above average, but it at least is a luxury-priced vehicle that is more in reach of many people.
We should therefore be encouraged that the less expensive Model 3 is growing, even though some of this has been at the expense of the company’s two previous models, the Model X and Model S. With another company, this would probably mean sacrificing per unit profits, but there are no per unit profits with Tesla, at least not yet, and they do have to do something to bring their all-electric vehicles in reach of more people.
When a car costs more to make than people want to pay for it, you are faced with two choices, to stop making them or make them cheaper. The cheaper part here doesn’t necessarily mean less expensive, but it does mean offering them at a price where they are a value to both the buyer and the company.
Tesla’s New Chinese Factory May Be a Game Changer for Them
Tesla getting its Chinese plant up and running is a bigger deal than it may appear. It simply costs less to make things in China. Their new plant in Shanghai is now operational after only 10 months, and is beginning its first trial runs. Tesla states that costs of production will be 65% less than at their plant in the U.S., as people simply work for less pay over there.
If someone were looking to start a new car company, the last place they should look to build them is in the United States, even if that’s where most of the market is. Even with additional costs of shipping and tariffs, it’s still a lot cheaper to build them in China, and it also makes economic sense to import cars from places where they can be produced more efficiently.
Trade allows countries to better specialize to seek out production advantages, and China has production advantages with a great many things. There are countries with lower labor costs, but China also has the size and the infrastructure that is also needed in order to achieve greater efficiency.
The Chinese market for cars is also pretty substantial right now, especially for electric cars. The amount of air pollution in China’s major urban centers is well above acceptable levels, and while the notion of pollution warming the earth to crisis levels one day may be controversial, air unfit to breathe at least should be less so.
Tesla’s main competitors are already making electric cars in China, although none on the scale of Tesla, who remain the market leader. Cars made elsewhere are too pricey to compete in this market, but producing them in China levels the playing field and allows Tesla to further ramp up their sales while striving for profit at the same time, which is unfortunately a novel idea with this company.
Tesla is also planning to build a large factory in Europe, to cater to that market, although they really do need to ensure that they are not so expensive to produce that they cannot be made profitably, which has been the case all along with their U.S. based cars, at least so far anyway.
In their recent Q3 earnings call, Tesla shared that the profit margins for the U.S. built Model 3’s are improving, which has been a real sore spot. This at least bodes well for the future, and the task now will be to raise them further so the results from Q3 will be the norm instead of the exception.
In 2017, Tesla had a terrible year, with quarterly losses per share of $2.04, $2.04, $3.70, and $4.05. 2018 started out the same way with the first two quarters producing losses of $4.19 and $4.22 per share, but the second half was better, coming in with gains of $1.75 and $0.94. They still lost a lot of money in 2018 but we at least appeared to be heading in the right direction.
The first two quarters of 2019 saw Tesla’s earnings move back into the red, and clearly so, with losses of $4.10 and $2.31. Their 2019 Q2 results drove their stock price to levels not seen since 2016, although it did find support at this level, but this virtually guaranteed that they would lose money for the 12th consecutive year in 2019.
The expectations on the street for Q3 2019 was for more red ink, although less of it than the previous two quarters. Tesla actually earned $1.86, versus expectations of -$0.42. Revenue for the quarter actually came in a little less than expected at $6.3 billion versus the $6.33 billion that was hoped for, but this means that their margins were higher than expected, which is exactly what we need to see with this company.
Q2 of this year also saw their revenue right in the same area, and a little higher than this last quarter in fact at $6.35 billion, but they lost quite a bit of money. They are at least getting better at cutting costs.
In spite of the huge struggle that this company has had, and their terrible annual earnings record, this means that Tesla has reported positive earnings the last 3 out of 5 quarters, so that at least suggests that they are at least moving more in the right direction lately.
Tesla’s More Fun Earnings Call on Thursday Has Increased Hope
It was no surprise that Tesla’s stock price leaped after this latest earnings announcement, going from $254.68 per share to $299.68 in one day. The next day, Friday, the party continued, seeing it close the week at $328.13.
Often times, the market will overreact to an earnings report, where we see it move too far in the direction it is going and then correct at least somewhat. We saw that with Amazon on Friday, where they were initially down 6.75% after the earnings disappointment was announced, but closed the day down only 1%.
Unlike with Amazon, Tesla’s struggles have attracted a lot of buzzards, a huge amount of them in fact, and about 25% of Tesla’s shares have been sold short. This adds downward pressure to the stock at the time of the short selling but also exposes these traders to upside risk when something like this happens.
Thursday’s call had some of these short sellers scrambling to cover their positions, leading to the unusual situation of day 2 being almost as big of an up day as the event day. Tesla’s spastic results made this short a pretty risky one anyway, and those who refused to cover as Tesla moved up from $178 to $254 brought the additional pain of seeing it break $300 again upon themselves.
All that short interest adds a lot of potential bullishness to a stock, provided that the stock can actually scatter all these vultures. With so many still flying around, if the stock can continue its momentum, and short covers will in itself help to keep it going, there may be even more upside in the near term for this stock.
There are also traders who have bought the dip and are now up a lot of money, and when the buying frenzy subsides, we will see some sort of pullback, and perhaps even a Tesla sized one, which has shown plenty of volatility in both directions over its history, this year included.
Tesla is far from your typical stock in any sense, and this is especially the case with the wide range of outlooks and price targets among the analysts who follow it. Targets range from $200 a share to $530 per share, and the $200 target was just updated from $150.
Both the bullish and bearish analysts have adjusted their targets as a result of this latest earnings call, which only makes sense, but how well Tesla can keep this one quarter in a row momentum going remains to be seen.
Tesla’s status has perhaps been upgraded from critical to serious, and the prognosis for them finally getting out of the hospital one day has improved, although we’re still pretty far off from that.
The next two quarters will help tell the story better, and if they can make money three quarters in a row, with a profit of any amount, this will take them to an entirely new place and suggest that the hope that so many have had with this company may not have been so much in vain as it has appeared to be thus far.