The news about Tesla Motors regularly repeats a complaint about the cash burn rate, the fact that Tesla routinely runs at a loss, is propped up by investors, and eventually the house of cards will come crashing down. There’s some truth to this – the company showed a profit in only one quarter (to the best of my recollection) shortly after the Model S production ramped up enough to produce significant revenue. That would have been Q1 2013, six months after Model S deliveries began, and after fixing production problems that held back sales and deliveries for a couple quarters. Since then, Model S and Model X sales have been rapidly increasing, as has been revenue, the Model X was developed and went to production, the Model 3 has been under R&D and is about to go to production, and Tesla Motors merged with Solar City, and their “Tesla Energy” product line has been growing as well.
In short, Tesla has a growing line of products, growing sales, growing revenue, a rabidly fanatic customer base, and a huge aura of excitement. Those attributes are the recipe for a great company with a bright future.
Yes, the fact that Tesla’s financial filings show that quarter after quarter a big “loss” is a thing to be worried about. It means Tesla’s debt load to investors is building. It doesn’t matter what kind of company it is, the debt load must be within manageable levels. Capitalism is based on the model of entrepreneurs taking out a loan, using loan proceeds to build a new factory, with which they build new products, and pay off the loan in the future. Tesla is following that same model, assuming future Model 3 sales will pay off the loans they’re taking on.
Tesla could be profitable tomorrow. It’s simple, really, they’d just have to scale back Research and Development costs and voila the balance sheet would show a profit. But Tesla wouldn’t have the much-teased Semi Truck and Model T pickup and 2nd generation Roadster developed and ready to go over the next couple years, nor would they be able to build the new Gigafactories and Solar Gigafactories and automobile production plants required to build all those new vehicles and solar panels and battery packs.
A couple years ago Elon Musk proposed they’d be selling a few million cars per year by 2025. Some back of the envelope calculations on my part suggests that goal would require 10 car factories and 10 Gigafactories. By 2025.
To see what I’m saying, let’s make a quick look at the Tesla’s May 17, 2017 10-Q filing with the SEC. For the three months ending March 31, 2017, Tesla received $2.7 Billion in revenues, had “cost of revenues” at about $2 Billion, for a $667 Million gross profit. That’s the result of strong sales for the Model S and Model X and other products and services. We don’t need to go over the details, that’s all in the 10-Q filing.
Why did Tesla show a $257 Million loss in Q1 2017? The R&D cost was $322 Million, and the “Selling, General and Administrative” cost was over $600 Million, for a total cost of $925 Million. $667 Million minus $925 Million is a couple hundred $Million in loss.
How would Tesla show a profit in the current circumstance? Cut back costs. That cutback would have to cover both R&D and SG&A cost reductions to get expenses below $600 Million.
The effect of cutting expenses is that Tesla Motors would be unable to move as quickly as they have. The company has an extremely aggressive plan and they need to stay ahead of competition from other automakers and other solar and energy storage companies. That aggressive plan means lots of new hires, building out production facilities, installing factory equipment, spending on R&D to develop new products, and on and on. None of that comes for free, it’s quite expensive actually.
Many of us were in long lines on March 31, 2016 to put down a $1000 deposit on a car we hadn’t seen. That was a big vote of confidence on our part. To fulfill our confidence in Tesla Motors, the company changed their plans from producing the Model 3 at a 100,000 rate per year in 2018 to producing 500,000 per year in 2018. That aggressive a ramp-up in production means that Tesla probably won’t reach that goal, but more importantly comes at a large cost. Our anxiety over when we can buy our Model 3 is directly tied to the huge costs Tesla Motors is bearing to answer our desire for the Model 3.
Next year, the financial boost from Model 3 sales will start to be seen in the financials. Tesla’s corporate revenue will be much higher than it is today. Will the company show a profit at that time? Maybe. Or, maybe not.
Tesla is now promising the Semi Truck and Model T by 2019, and perhaps a 2nd generation Roadster a couple years after that. In other words, Tesla Motors is on an aggressive path of designing and sending to production a full line of vehicles, all of them electric. Will Tesla take a rest after the Model 3 goes on sale? No. Because of that, the company will be aggressively plowing money into building new factories, designing new vehicles, and therefore they’ll keep on running at a loss.
Tesla is running hard to reach the future.
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Good analysis, David. It is a shame that the critics won’t accept this logic, which is a laudable effort to make the world a better place. We all await our 3s….
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