Can Tesla keep the money flowing?
For an investor, profit is key. A company’s value is based largely on if it is making money and if it will make more money, down the line. Tesla makes the question for investing an interesting one.
Elon Musk’s illustrious automotive company has never had a full year in the black. But things may be looking up: Tesla made $139 million in profit during Q4 2018, marking the first time it had two quarters in a row of profit—and only its fourth ever quarter of profit—in its 15-year history.
This success arrived hand-in-hand with a jump in car sales. Tesla was able to increase sales by increasing its production numbers of the Model 3, its mass-market sedan. Yet this success did not last, as from Q4 2018 to Q1 2019, the dropped from approximately 86,000 to 63,000, with revenue dropping from about $7.23 Billion to $4.54 Billion, respectively.
The key predictor for Tesla’s long-term success is in its short-term sales, which reflect its marketing and production, as well as its consumer reception. For this, it’s useful to discuss the cost and revenue of its most recent, and therefore most relevant, product, the Model 3. The price of a Model 3 is a minimum of $35,000, which we assume as the standard selling price in this analysis. Quartz reported that, according to German engineers who took one apart, the cost to produce a Model 3 is $28,000; but business professors have pointed out that this margin does not include additional cost structures that established carmakers don’t have, such as factory expansions, and Tesla’s own dealership network.
Some have therefore suggested a price no lower than $50,000, a number we are in agreement with. In addition, we viewed the sales record of Tesla’s Model 3. In Q3 2018, the company produced approx. 53,200 and delivered 56,000; in Q4 2018, they produced and delivered 61,000, and 63,300, respectively; and in a drastic change, they produced 63,000 vehicles, yet they delivered around 51,000, showing that the Model 3’s popularity did not last. This meant the cost of $33 million dollars of money that could have been allocated or spent in other ways, rather than production.
Above all, we recommend investors choose carefully with Tesla, considering its profit history in its entirety. As well they should see how Tesla works to improve its profitability. It’s suggested first that Tesla increases the price of its vehicles, as while this would decrease sales in favor of revenue per sale, an increase in price may have a relatively small effect on the number of sales, as the target consumer is usually upper-class. As well it’s suggested to implement more cost-saving techniques. The company could reduce distance to its dealerships, as done in China, with their giga factory. An investor should also hope for potential technical breakthrough to reduce its cost of production.
Written by Yan Wang & Edited by Alexander Fleiss, Derek Chiang & Devaansh Mahtani