For Tesla, the Proof Will be in the Profit

I’ve avoided writing about Tesla. OK, to be honest, I’ve avoided thinking about Tesla.

It seems that Tesla is a “someday” stock. Someday it may be something real and profitable. The question for me, and for other investors, is when will that happen? And with so many other things to think about and write about, I don’t want to be that someone who offers the latest prediction about Tesla (which is usually wrong).

I still don’t want to think about Tesla. But Tesla (NASDAQ:TSLA) just had an announcement that is difficult to ignore.

Can 92,500 consumers be wrong about Tesla?

In the most recent quarter, Tesla announced the delivery of 95,200 vehicles. This beat Tesla’s own internal estimates of 90,966 and a FactSet consensus analyst estimate of 90,700. Not surprisingly, Tesla’s stock shot up climbing 7% in after-hours trading to $240.50. And the stock has continued to climb to its current level (as of this writing) of $252.38. As gratifying as this leap has been for investors, the stock is significantly below its 52-week high of $387.46 and remains down over 25% for 2019.

The proof will be in the profit

The delivery number is impressive if only because it demonstrates the potential for Tesla to deliver products at scale. Delivering products at scale has been a promise that CEO Elon Musk has made, but prior to this quarter was failing to make good on. However, for investors, the real question is, will Tesla be profitable? On that metric, the story is not as good.

Of the 95,200 vehicles delivered in Q2, nearly 80 percent were of their Model 3 variety. The Model 3 is the volume seller of the Tesla fleet. In fact, Tesla recently announced that they were cutting the price on the Model 3 by $1,000. But this is not where Tesla is going to make their margin. The average selling price for the Model 3 is $51,000. The margin for Tesla will come from their higher-priced Model S and Model X. However, those products are showing softened demand. This means that despite its record deliveries, it’s hard to see that Tesla will report a profit.

Tesla Charts, a leading online critic of Tesla, makes a compelling case that the company would need to generate $1.453 billion in positive margin to turn a profit for the quarter. Using Tesla’s recent earnings letters and subtracting the company’s total reported net income from their total reported automotive gross margin, Tesla Charts came up with a simple estimate of $15,263 as the company’s margin-per-vehicle in order to break even. While this number does not take into consideration leasing and other factors, it shows how difficult it will be for Tesla to turn a profit this quarter.

Perhaps more tellingly, the company itself did not offer any comments about its near-term profit and/or cash flow expectations. In its Q1 letter to shareholders, the company claimed it would be profitable in Q3 and Q4 and cash-flow positive from Q2 through Q4. But at the June shareholder meeting, Musk simply said the company “could be cash-flow positive” in 2019 in spite of the high growth rates.

It’s a matter of trust

And this is where the real problem with Tesla lies. The numbers don’t add up … yet. The question is if they ever will. Tesla has a history of overpromising and under-delivering. When second-quarter earnings show a loss – and they undoubtedly will – the question will shift from when will Tesla be profitable to will Tesla ever be profitable?

Tesla is trying to get investors to focus on the numbers – like deliveries – that they have a reasonable expectation to go up. Tesla is threading a needle that is based on hopeful prospects including if their Model Y SUV gets released and if they manage to get their production facility in China up and running. However “ifs and buts” don’t mean profit for investors today. The company has introduced a Model 3 car that has increased sales but also moved the company towards a customer base that does not look like the “early adopter” that the higher-priced models would attract.

This is called moving the goalposts and investors and consumers have seen that too many times with Tesla.

There is a story behind Tesla. I just don’t know what it is. Maybe they are the company that has to fail in order for others like it to succeed. Maybe they will still be that company. Whatever the story is, there seems to be too many blank pages. Too many times Tesla has come across looking like the Wizard of Oz shouting “pay no attention to the man behind the curtain” when faced with the hard numbers.

Maybe this time will be different. But for me, that’s a question for someday. Not today.