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A Tesla showroom in Brooklyn New York

Tesla Slips Financially, as Musk Reiterates 500,000 Cars by 2018

Aug. 4, 2016
Production at Tesla Motors is humming, according to CEO Elon Musk, with the maintained production promise granted by the Gigafactory cushioning the financial blow for investors.

After a tumultuous summer at Tesla Motors Inc., Elon Musk spent most of his time on an earnings conference call assuring investors that his grand plans are intact despite missing expectations for sales and earnings in the quarter.

Musk, whose financial goals often fall short and whose new models arrive late, said that Tesla is on track to release the much-awaited Model 3 sedan in late 2017 and to produce 500,000 cars in 2018. The company is even investing more efficiently to conserve cash.

The CEO said Wednesday that Tesla “just managed to climb out of hell” in June and that now the “production line is humming.” That’s a big change for Musk, who said just three months ago that he was sleeping by the assembly line to fix factory problems. The manufacturing progress and affirmation of goals cushioned investors from the disappointment of losing $1.06 per share on an adjusted basis — more than double the year-earlier deficit and 77% more than analysts had estimated.

Tesla shares slipped 0.1% to $225.60 at 8:38 a.m. New York time before regular trading. They had declined 5.9% this year through Wednesday.

“The key is that Tesla reiterated 500,000 vehicles in 2018,” said Charlie Anderson, an analyst at Dougherty & Co. “They spent more money, which is why EPS was down. But the spending was on R&D. This is a company that is continuing to invest the future.”

It has been a tough quarter for Tesla, with shareholder unrest over its surprise bid to acquire SolarCity Corp. There was also the revelation that U.S. regulators are investigating a fatal Florida crash that involved Autopilot, Tesla’s driver assist technology. After that, Musk released a 1,500-word manifesto that revealed plans for new vehicles like a semi-truck and a bus.

The shares slipped a bit in late trading Wednesday after the second-quarter earnings release, but it was a muted response to the profit shortfall. Investors were encouraged by improved automotive gross margins, which excludes the sale of zero-emission vehicle credits that other automakers need to meet California’s tough regulatory requirements. At 21.9%, they topped the consensus estimate of 21.5%, UBS Securities analyst Colin Langan said in a research note.

Musk said cash flow improved in the quarter, even as the Palo Alto, California-based company worked to complete the Model 3’s engineering. The company reported negative free cash flow of $144.4 million, better than the $309.6 million analysts had predicted, because it spends less on capital expenditures.

The stock reaction is “another lesson that Tesla’s stock doesn’t trade over earnings per share,” said analyst Ben Kallo of Robert W. Baird & Co. “Automotive gross margin improved, and the commentary about demand helps with the stock as well.”

Even after 373,000 Model 3 reservations — unchanged since May — Tesla said Model S orders increased in the quarter.

Musk talked tough about suppliers for the forthcoming Model 3, saying that “suppliers who fall short will be cut out of the picture.” 

Tesla will also make its own inverter, a crucial but little-known device that converts direct-current electricity, like the kind generated by solar panels, into the alternating current that can be used in homes. Tesla wants to buy SolarCity to offer owners of Tesla’s electric cars three additional products for their home: solar panels on the roof, a home battery known as the Powerwall to store solar-generated electricity and a home charger for the car.

“There’s no question Tesla’s going to do an integrated inverter. It’s the logical thing to do,” said Musk during a conference call with analysts. “Most people don’t even know what an inverter is.”

Musk stressed that Tesla’s top priority is the Model 3, followed by the Model Y, a compact SUV that will be built on the Model 3 platform. He said that Tesla could unveil the Tesla semi and minibus within six to nine months and put them into production within a few years.

Musk bristled at the intense focus on the fatal Florida crash involving Autopilot, noting that 35,200 people were killed in vehicle accidents in the U.S. last year but that “Tesla can’t sneeze without there being a national headline.” He said that Tesla will continue to improve the technology with the goal of achieving full autonomy.

“Full autonomy is going to come a hell of a lot faster than anyone thinks it will,” he said. “And I think what we’ve got under development is going to blow people’s minds. Blows my mind.”

By Dana Hull

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Licensed content from Bloomberg, copyright 2016.

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