By on November 6, 2013

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After reporting a net loss of $38 million in its Q3 filings earlier today, Tesla suffered a loss of over 12% in afterhours trading. The stock, which has grown nearly 80% since the beginning of the year shot down almost $22 since the markets closed on November 5th.

In my last look at Tesla in Q1 of 2013, the company had posted its first net income, a tidy $11 million. However, analysis revealed that the company’s profitability, which garnered praise from across the industry, could not be attributed to the OEM’s main objective, the production and subsequent sales of its automobiles. Rather, Tesla’s profit was derived from “Other Income,” which is accounting jargon for money that is made outside of the scope of the company’s normal operations.

Two fiscal quarters later, and the profitability structure of Tesla is steadily improving, with Tesla exhibiting signs of strong operational profitability. This is attributable to Tesla’s increase in gross margin to 24%, from 17% at the beginning of the year. The company reported a gross profit of about $103 million for the quarter. What this means is that by simply taking all of Tesla’s sales, less the costs of goods sold,  the company is in the black. Contrast that from a year ago, when Tesla’s gross loss was almost $9 million.

This is quite an encouraging figure, especially considering the steady decline of ZEV credit revenues. Back in Q1, ZEV credits were responsible for 12% of Tesla’s revenue, while it now equates to about 2% of total sales. Additionally, Tesla’s Statement of Cash Flows reports positive cash flows from operations of $102 million.

One thing that has not changed for the company is its struggle to manage its operating expenses. With a total of $133 million for the quarter, Tesla’s fixed costs effectively wipe out any profitability achieved on the top line. For the past two quarters, Tesla’s operating expenses equaled about 30% of sales. While gross margin has improved, there is simply not enough unit contribution to cover the remaining costs when costs of sales are 86% of revenue. The recipe to profitability is simple. Tesla must either bring down its fixed costs, or continue to improve its margins. A combination of both is the best case scenario.

In its letter to shareholders, Tesla remarks that R&D costs are up due to work on a right hand drive configuration for the Model S, and development work on the Model X. Selling General and Admin (SG&A) also increased, as the company is pushing its global expansion and growing its Supercharger network. Both of these expenses are key to Tesla’s future success. Continued development and innovation of new and existing technologies is essential for the electric automaker to diversify its product offerings while also continuing to make them more practical and accessible to the larger population. As a result, a reduction in operating expenses seems unlikely in the near future.

One of the primary responsibilities of any publicly traded company is to deliver value to its shareholders. With an earnings per share figure of $-2.09, Tesla has not done a great job of doing so to date. While it is still too early to tell whether the hype is real for Tesla, it is clear that after today’s results, some of the luster has been lost. I am no investment advisor, but I am a fan of history, and historically, Tesla’s poor profitability has remained a constant.

All figures taken from Tesla’s SEC Filing

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario. 

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20 Comments on “Tesla Loses $38 Million In Q3...”


  • avatar

    NOOOOOOOOOOOOooooooooo

  • avatar
    Land Ark

    Well good. This comforts me knowing I got fed up with its poor performance and sold it for a loss at $27 about a year ago. Oh wait, no it doesn’t.

  • avatar
    Rod Panhard

    Sometimes it sucks to be correct.

  • avatar
    EquipmentJunkie

    Did their Smoke & Mirrors PR machine run out of charge before reaching the office?

  • avatar
    Pch101

    It’s also worth noting that R&D spending during 2013 has been consistently lower than the year before.

    The company has presumably been doing that in order to reduce its losses and to build cash. (Under US GAAP, R&D is an expense, so a dollar in R&D spending equals one more dollar of net loss.) That isn’t a sustainable plan if the company intends to expand the lineup and develop a replacement model for the current car.

    The current gross margin is highly dependent upon high per-unit vehicle prices. That’s also a threat to long-term prospects — there is only so much of a market for $75,000+ average vehicle prices. It also doesn’t bode well for the much vaunted $35,000 people’s EV — apply those types of revenue figures to this cost structure, and the whole thing falls apart.

    • 0 avatar

      Your point about developing the next Model S is a good one that hasn’t been raised before. The market that they’re selling the Model S to seems to me to be very fashion dependent. The Model S is currently the new big thing in the luxury segment, but it won’t be in another couple of years. A regular car company would be working on the next version as soon as the first was on sale, or sooner. Tesla will have to have at least a mid cycle refreshment of the Model S by the 2015 or 2016 model years if they want to keep growing sales of that Model.

      • 0 avatar
        Pch101

        One of the primary reasons that small automakers struggle in a global economy is that they can’t cover the high costs of R&D.

        Those costs are manageable for a monolith like Toyota or Volkswagen, but they are formidable to a company as small as Tesla. They’re a huge barrier to entry that would frighten most sensible people away from forming an automotive startup. It could work when the model cycles were lengthy, but with refreshes required every few years and new platforms and drivetrains needed every several years, the costs are difficult to hurdle without volume.

  • avatar
    GS650G

    You can only coast on tax subsidies and creative accounting for so long. The cars are expensive and there are known issues with range, battery death, parts supply and an economy which putters along.
    How many well-to-do’ers are going going to buy this as a toy anyway?

    look for bailers on the stock today, by Friday I bet it’s below 100 a share or lower.

  • avatar

    At some point, someone might ask about the wisdom of Tesla trying to own its own dealer network.

  • avatar

    Also, gross margin can be achieved by improved economy of scale. This can be achieved by going mass market and boosting volume, which requires, among other things, a robust dealer network. Tesla has the production capacity at NUMMI to boost volume substantially. But the Model S won’t give them what they need. Economy of scale improves gross margin only if those savings aren’t passed along to consumers. To boost sales Tesla would have to lower the price of the Model S. And if Tesla lowers the price of new Model S, it kills the resale of the pre-owned vehicles already in the hands of consumers, many of whom have a “value guarantee” provided by Tesla.

    Increased production brings with it the need for “smoothing” and “buffering” of production. Herky jerky start stop assembly lines are maddening and inefficient.

    At some point, build to order doesn’t work any more. Once that genie is out of the bottle, it won’t go back in. Tesla will find itself in a rather typical situation it will share with conventional auto manufacturers. It will need immense amounts of cash or a dealer network of private investors. Tesla is better off to recruit the dealers while there is still a strong element of cache associated with the company rather than to wait until everyone knows they are forced into it by economic realities.

    • 0 avatar
      krhodes1

      Funny, BMW manages to do quite well running exclusively as a Build-to-Order manufacturer. Every BMW is that way, whether for an individual or for a dealer. BMW certainly builds more cars than Tesla will ever dream of building.

      Personally, I think they are doomed, but not because of how they build and sell their cars, but rather because the current tech simply isn’t good enough for mass appeal. If they could make a car that actually matches the capability of an internal combustion engined car, including adding 4-500 miles of range in <5 minutes virtually anywhere on the planet, the world would beat a path to their door. Even if they had to order the thing on a website and wait 3 months for delivery.

      • 0 avatar

        I don’t know who told you BMW builds to order. Cruise by any BMW dealer in the U.S. and count the vehicles in dealer inventory. That is NOT build to consumer order. The build to dealer allocation and the dealer pays for the car, stocks it, and retails it, a far cry from what Tesla is trying to do.

  • avatar
    70Cougar

    Tesla is working on the Model X and a more affordable car. This should keep the product line fresh, and, presumably, its R&D on at least the drivetrains for those models will benefit the next Model S.

    Volume should help with margins, as each store moves more metal. (Tesla has a showroom in the mall near me in Maryland, and as of a few months ago, they couldn’t even sell cars out of the store because of some kind of regulatory issue–that doesn’t help margins).

    There is probably no more difficult industry to break into than the auto industry, and I’m impressed with what Tesla has donse so far.

  • avatar
    APaGttH

    Is there really THAT much ROI on a RHD Model S? I get it isn’t the same as developing a whole chassis, but it isn’t two engineers and all the pizza they can eat either. It’s tooling, mechanical, internal, parts, human factors, crash and safety.

    It seems going meh on RHD for now and accelerating the Model X and the “Tesla for everyone” makes more sense.

    I never thought Tesla would get this far. I’ve already posted I was wrong. I think they are viable but they need to expand their product lineup and their customer base.

    When you sell more you amortize the R&D costs faster, and lower the overall per unit cost lowering operating costs.

  • avatar
    GiddyHitch

    The Model X should keep the ecorich interested for another couple of years just as the luster starts to wear off the Model S, by which time the 4th model is hopefully ready to make Tesla’s push into upper-middle class hearts and minds. Or maybe gas pops over $5 per gallon and everyone loses their collective shit while delivery times for Prii and Teslas increase 3x.

  • avatar
    RobertRyan

    What is the future for EV Startups ,Fisker and now Tesla and EV’s in general?

  • avatar
    porschespeed

    So Mr. Kreindler, Do give us a total accounting of ‘money in’ and ‘profit out’. Oh, that’s right, it’s something around negative $500MM…I understand educational institutions like to promote this sort of nonsensical accounting, but those of us who have functioned in the real world get that the black eventually has to be greater than the red. Even for GM…

    Tesla will never, ever, ever, actually *make* money on sales. Let alone enough to recoup initial investment. Ever. Even after they run Musk out of town on a rail. Just like they did at PayPal. Before it got big.

    Musk may be a conman extraordinaire, but that never works in the long run. Just ask Malcolm Bricklin, or more importantly, anyone foolish enough to buy into Chery…

  • avatar
    LALoser

    I just worked on a new Tesla service center today. It is amazing the “value engineering” going into it.


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