Tesla delivers ‘game changer’ quarter of profit

Source: By Dana Hull, Bloomberg • Posted: Thursday, October 24, 2019

Tesla Inc. flipped the script on those who doubted Elon Musk could return to profitability and meet aggressive timelines, delivering positive earnings few saw coming and declaring it’s ahead of schedule on a new plant and product.

The electric-car maker earned $1.86 a share in the third quarter, exceeding the most optimistic projection by a wide margin and beating the consensus estimate for a 24-cent loss. On top of that, Musk peppered investors with positive updates: Tesla’s new factory in China is already starting production, the Model Y crossover will launch months earlier than expected next year and the long languishing energy business is showing signs of life.

It all added up to a report that broke the mold for Musk, 48, who’s notorious for setting stretch goals that take longer to pull off than he plans. While Tesla still faces challenges — quarterly revenue fell for the first time since 2012 — the chief executive officer has reined in expenses to pad gross profit margins. Shares climbed in late trading to levels last seen in February.

“If you look at the margins and the profitability, that’s the major feather in the cap for the bulls,” Dan Ives, an analyst at Wedbush Securities, said on Bloomberg Television. “If they can maintain this, this could be a potential game changer for them going forward.”

Tesla shares climbed as much as 21% to $308.50 in late trading. The stock was down 23% this year through yesterday’s close. The company’s 5.3% bonds rose 2 cents on the dollar to 93.75 cents, according to Trace, the highest level since March 2018.

Trial output of the Model 3 is underway at the factory Tesla began building early this year on the outskirts of Shanghai. Producing the sedan locally enables Musk to charge less for the car by avoiding import duties. The factory “opens up a whole new market” for the company, said Gene Munster, a managing partner at venture capital firm Loup Ventures.

Production and deliveries of the Model Y, which shares underpinnings with the Model 3, will start in the summer of next year, rather than the fall. Musk — never one to back down from outlandish predictions — said the crossover could outsell the Model S, X and 3 combined.

A new Tesla pickup, which Musk has teased on Twitter and said could be unveiled next month, is the company’s “best product ever,” he told analysts on the earnings call.

‘Niche products’

The CEO was as candid as he’s ever been about the extent to which Tesla is no longer focused on the high-priced Model S and X, both of which can sell for six figures, calling them “really niche products.”

“To be totally frank, we’re continuing to make them more for sentimental reasons than anything else,” he said. “They’re only of minor importance to the future.”

For all of Musk’s nonchalance, the pivot toward lower-priced cars at the expense of pricier models has been financially taxing. Revenue fell to $6.3 billion in the third quarter, missing analysts’ estimates and dropping from $6.8 billion a year ago.

Earnings improved in part thanks to the company recognizing about $30 million of deferred revenue based on Musk making a controversial addition to its suite of drive-assistance features known as Autopilot. Smart Summon, which allows Tesla owners to tap their smartphone and remotely call for their car to pick them up, was rolled out to customers through an over-the-air update days before the end of the quarter.

“The business model is slowly shifting to high-margin software,” Loup Ventures’ Munster said.

Musk has been charging customers for performance features that Tesla vehicles aren’t actually capable of yet. At the end of June, the company said it expected to recognize $567 million of deferred revenue in the following 12 months. It’s now anticipating the release of almost $500 million tied to the rollout of Autopilot and “full self driving” features, according to the statement, which doesn’t give a time frame.

Tesla’s gross margin in the third quarter was 22.8%, down from a year ago but a 3.9 percentage point improvement from the prior three months.

“The balance sheet is good, demand’s good and gross margins beat expectations across the board,” said Ben Kallo, an analyst at Robert W. Baird & Co. who recommends buying Tesla shares. In the coming days, he predicted, “you’ll also see a lot of short covering.”