Shares of electric carmaker Tesla (NASDAQ:TSLA) fell on Thursday following mixed quarterly results posted after Wednesday’s close. Tesla, often buoyed by revenue growth that isn’t as profitable as hoped, repeated that pattern for its fourth fiscal quarter ending in December.
Sales of $7.23 billion were better than the $7.08 billion analysts were modeling, while adjusted per-share earnings of $1.93 fell short of the projected figure of $2.20. Yet, it marks Tesla’s second consecutive quarterly profit … defying more than a few doubters who felt the spendthrift company led by often brash CEO Elon Musk would never achieve sustained viability.
Still, there’s still cause for concern. Why? Because this may be as good as it gets for Tesla stock holders.
Recapping Tesla’s Earnings
For the three month stretch ending in December, Tesla’s top line grew from $3.29 billion a year earlier to $7.23 billion om Q4. Profits fell short of analyst expectations but were well up from the year-ago loss of $3.04 (due to heavy spending on production capacity for the Model 3).
The Model 3, in fact, accounted for the bulk of the previous quarter’s business. Tesla announced in early January that of the 90,700 vehicles it had delivered during the fourth quarter, as many as 63,150 were Model 3s.
Musk commented in the official quarterly letter to shareholders:
“Model 3’s success has carried over to our financial performance in Q3 and Q4 of 2018. Operating income in Q4 remained stable at $414 million despite a sequential decline in revenue from the sale of regulatory credits, higher import duties on components from China, a price reduction for Model S and Model X in China, and the introduction of a lower-priced mid-range version of Model 3.”
Drilling Down Into Tesla’s Numbers
Although a success by most fiscal measures, current and would-be owners of Tesla stock have good reason to be concerned.
“This is a strong indication that demand in the U.S. for both the mid-range and long-range Model 3 versions has largely been exhausted, and the company is still working through the estimated ~6.8k of unsold Model 3 inventory,” analysts from Cowen commented in response to clues that the company is only manufacturing cars for China and Europe at this time.
Other anecdotal evidence suggests the same. Even as it’s planning to build enough capacity in China to manufacture at a pace of 500,000 vehicles by the end of the year, it’s laying off U.S. workers. In mid-January the company announced it would be reducing its headcount by 7%, mostly as a means of driving down the average cost to make the Model 3 in the wake of an end to the federal government’s $7500 EV subsidy that was cut in half as of January 1st, and will end altogether later this year.
“We have to be relentless about costs in order to make affordable cars and not go bankrupt,” Musk said during the call.
Even then though, it may not be enough to log actual fiscal progress.
“Things really aren’t going to get any better for Tesla in the U.S. than they did at the end of 2018,” commented Edmunds’ executive director of industry analysis Jessica Caldwell. She added: “Turning a profit, creatively addressing production challenges and getting the Model 3 to the masses were huge milestones, but keeping up this momentum is going to be virtually impossible.”
Meanwhile, EV competition within the U.S. is finally becoming palpable. Sales of the Prius Prime from Toyota Motor (NYSE:TM) grew slowly but steadily over the course of last year, as did BMW. Hyundai, Kia, Audi and Jaguar all have EV debuts planned for the United States this year, falling across the price spectrum; Ford (NYSE:F) is moving ahead with an $11 billion investment that will bring 40 electrified vehicles to the market by 2022.
Things may not be any easier overseas either. New rival Nio (NYSE:NIO) is starting to turn heads in China, prompting UBS analyst Paul Gong to note this week, “We still think NIO is well positioned in China’s EV megatrend from a top-down view.”
And, Nio isn’t the only electric vehicle maker taking aim at China.
Looking Ahead for Tesla Stock
For the year now underway, Musk believes the company will produce between 360,000 and 400,000 cars. Unofficially, he suggested Tesla might be able to produce more. As of the most recent look, analysts are calling for a full-year profit of $6.16 per share of Tesla stock on revenue of $28.7 billion. The company lost $1.33 per share last year on sales of $17.6 billion last year, though it swung to a profit mid-year.
Scaling up production should help drive the production cost of the Model 3 down from its current figure of $44,000 — at the low end — and help maintain and even widen profit margins.
Conversely, we’re talking about a person who has often overestimated his company’s capabilities while underestimating the costs, and time, needed to reach public goals.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.