Analysis: Is Tesla Doomed to Lose Money Forever?

  • Tesla results continue to fall short of its own projections

  • Electric car prices remain high, even with subsidies

  • Battery costs are a thorny issue as well

Tesla has had a love-hate relationship with investors from the moment the company first started operations.

The electric vehicle pioneer continues to produce uneven results in meeting revenue targets, hitting sales and delivery goals and its ability to demonstrate that it can maintain a consistent profit margin.

The company’s latest financial results failed to meet Wall Street’s minimal expectations. So what do these problems portend for the long-term viability of the company?

Poor financial results

Tesla’s latest quarterly financial reports were uninspiring. The company posted a loss of $1.12 a share, failing to meet the street’s modest consensus estimates of a loss of 39 cents per share.

Tesla had a $3.06 a share loss the previous year. For its second quarter, the company posted revenue of $6.35 billion, well below analysts’ expectations of $6.4 billion.

To add insult to injury, Tesla’s gross margins were 18.9%, a decline from 20.2% for the same period last year. Tesla CEO Elon Musk told analysts that he expects gross margins for the full year of 25%.

The dismal results prompted one analyst from Wedbush Securities to state, “Unless self-driving functionality and other software upgrades are sold with the company’s lower-priced Model 3 units, it will be a major challenge for Tesla to ramp its business model and gross margin profile in line with long term targets and therefore show profits on an ongoing basis.”

Missing performance metrics

One of the principal reasons for questioning whether Tesla will ever profitable for the long term is that it continues to miss the production and financial metrics that it establishes after each quarterly report.

Since Tesla has not reported quarterly profits on a consistent basis, meeting those other goals for operating viability are critical.

One such measure is vehicle deliveries. Ominously, sales of the company’s older backbone vehicles, the Model S large sedan and Model X sport- utility vehicle, fell 21% in the second quarter.

Deliveries of these mainstay vehicles amounted to 29,750 in the first half of the year. Given the tepid demand, it is difficult to see how the company can meet its delivery projection of 100,000 vehicles for the full year.

High-priced

The other substantial hurdle for Tesla’s future earnings growth is the high price of its electric vehicles. The Model S large sedan and its Model X SUV sell well over $65,000 — well above comparable traditional non-electric vehicles.

Musk is banking on the new Model 3 to bring electric cars to the masses. Yet last year the average selling price for the Model 3 was $57,000.

Although Tesla recently slashed prices on this model to $35,000, the dramatically lower sales for its high-end cars in conjunction with lower margins on the Model 3 leave many questioning how the company can be profitable.

At $35,000, even low-end Tesla vehicles are still relatively more expensive than comparable non-electric vehicles consumers can purchase that have similar, if not more features, that come standard.

Consumers with “range anxiety” who want extended battery life for the low-end Model 3 will need to shell out an additional $15,000.

All of these factors make it difficult to envision a mass market for Tesla’s lower-end electric cars that can generate profits for the company on a recurring basis.

Cost of batteries

The other technical challenges that continue to plague not only Tesla but other electric car makers is the seemingly insoluble problem of reducing battery costs.

Lithium ion battery costs actually dropped last year by approximately 24% due to a massive increase in manufacturing capacity. The change lowered unit costs as well as lower prices of key metal such as cobalt, nickel and lithium.

However, the optimism for a continued and stable decline in battery prices is premature. Lithium ion batteries do not follow the consumer electronics products declining cost models.

Batteries are produced using highly volatile commodities. Even though prices for these components fell last year they could easily rise once again as capital for extra mining facilities and processing capacity slows.

Many battery-cell manufactures are close to putting plans for expansion on hold and instead concentrating on achieving higher returns on existing facilities.

Additionally, there is the fire risk. As car manufacturers try to cram more power into less physical space, volatile lithium ion battery technology may be at its safety limits.

In short, if battery costs don’t continue to fall, affordable electric vehicles will remain beyond the reach of most consumers.

Are electric vehicles the wave of the future?

Wall Street analysts have a penchant for jumping on the conventional wisdom bandwagon and reflexively engaging in group think. The prevailing consensus on the prospects for Tesla among many patient investors is based on the tenuous assumption that electric or self-driving vehicles are the wave of the future.

Yet, for the reasons noted above, this belief may be too upbeat.

Many analysts seem to forget that electric vehicles are heavily subsidized through a $7,500 tax credit. Should these subsidies be reduced or eliminated it could deal a crippling blow to Tesla, which relies on this price support to maintain afloat.

A final problem for the company is that if it continues to characterize reported quarterly earnings that fall below analysts and investors’ projections as merely aberrations, it will have difficulty arguing how an unbroken string of poor quarters can be viewed as an exception instead of the rule.

Tesla’s cash reserves persistently run low. The company ended the quarter with $5 billion, in part because it raised $2 billion of capital in May. Some analysts project that its existing cash flow is sufficient to last only through the end of the year.

Repeated investor disappointment in missed vehicle delivery targets could mean the company will no longer be able to return to the capital markets well for more funding.

Any company that burns through cash raises the question: Is this really a going concern? Time will tell.

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