Tesla has released official Model 3 production and delivery numbers alongside overall figures, and it emerges that the company was able to average 4,100 Model 3 cars produced per week over the course of the third quarter that ended on September 30, 2018.
Why is this number significant?
Tesla expected to be profitable starting in Q3-18, which would be the first time in its 15-year history that financial figures are in the black. But that expectation was on the back of averaging 5,000 Model 3s made per week through the quarter. Now that the final figure has come in below that, it’s prudent to ask if Tesla can still post a profit this quarter, no matter how small.
In Q2, Tesla reported an operating loss of $621 million. We saw significant increases in SG&A ($213 million) as well as new expenditure for “restructuring and other” purposes ($103 million) compared to the same quarter in 2017, as a result of which operating loss bloated from $240 million to the $621 million figure quoted above.
As such, there are two ways in which Tesla might achieve profitability in Q3:
The first way is if their Model 3 margin multiplied by sales volume exceeds their operating expenditure and cost of revenues combined. Model 3 deliveries are the most relevant figure for calculating revenue, and Tesla delivered 55,840 Model 3s in Q3. We also know that Tesla “transitioned Model 3 production from entirely rear wheel drive at the beginning of the quarter to almost entirely dual motor during the last few weeks of the quarter.”
Since the Q3 delivery figure for Model 3 were almost triple that of Q2 and had a much higher mix of Dual Motor and Performance variants, we can safely assume that margins have been higher through Q3. And let’s not forget that paid options are very popular with Model 3 buyers. Between the extra $1500-$2,500 for paint colors other than black, the premium white interior for an additional $1,500, the EAP/FSD options that cost $8,000 if ordered before delivery and the Performance Upgrade Package adding another $5,000, it is very likely that Tesla did, in fact, make it to the black this quarter.
The second way to profitability is if they controlled their costs to an extent that would be sufficient enough to boost the bottom line into the black. Prior to the start of the third quarter, the company announced a 9% job cut. At the time, according to CFRA Research analyst Efraim Levy:
“I don’t think if Tesla becomes profitable in Q3 and Q4, that will be sustainable because of ramping up of the production. The layoffs may help them to achieve profitability in the near-term but not sustain it.”
Although the gains would be short-term, it would given Tesla the chance to be profitable in Q3, which is their immediate goal.
Apart from this, Tesla has not made any significant CapEx investments in Q3, relying instead on creating efficiencies within the production and assembly lines both at Fremont, where the cars are assembled, as well as the Gigafactory in Nevada, where the batteries and drive units are made.
That means Tesla could still report a profit for Q3, albeit a slim one, and thereby achieve its reiterated guidance for the quarter. However, it is critical for Tesla to be profitable in Q4 as well. Therefore, we may not see any further investments in production, but the delivery infrastructure and service capabilities might require monetary resources as Tesla ramps production of Model 3 EVs even further over the next quarter.
They can easily accommodate such resource requirements if they are cash flow positive through the next quarter. That’s assuming they’re already cash flow positive for Q3. We’ll only know that when Q3 results are officially reported, but considering the revenue mix this past quarter, that’s likely already the case.
In summary, even if Tesla is cash flow positive and posts a GAAP profit in Q3, they must increase Model 3 production by a significant factor and keep their belts tightened on the expenses front, especially CapEx. We don’t foresee any facility expansion during the final quarter of the year because independent analysts have already said that 7,000 to 8,000 Model 3s a week is within reach with minimal CapEx. At a current rate of 4,100 Model 3 cars a week, that leaves quite a bit of room for an ‘organic’ increase in production rates.
For the immediate future, Tesla needs to average at least 6,000 Model 3s a week for the next thirteen weeks until the end of Q4. That would put Q4 production for the Model 3 at around 78,000 to 80,000 cars for Q4, which is 1redDrop’s current estimate. That goal was originally set for the end of August, and it isn’t being achieved on a consistent basis, but if the battery bottleneck at GF1 is addressed by the end of October, it could help Fremont ramp up assembly numbers and bring the average up to that critical 6,000 a week mark.
“80,000 cars per quarter would mean maintaining an average of 6,000 Model 3s made per week. It looks a little unrealistic at this point, but if Panasonic can remove the battery bottleneck by adding the three new production lines it mentioned two months ago, Tesla may be able to compensate for the current sub-5,000-a-week Model 3 production level by ramping up production in the second half of Q4, presumably around mid-November. But that means they would need to be making between 7,000 and 8,000 Model 3s a week on a consistent basis right through the holiday season.” – 1redDrop | Oct 1, 2018
The final consideration is delivery numbers, which were higher than production numbers in Q3. However, that has largely been the result of once-off initiatives like a special weekend event, home deliveries and involving the Tesla EV owner community. That’s not a sustainable delivery model, so Tesla needs to figure out how to quickly ramp up its delivery capabilities for the long term. Deliveries for Q3 are already above production levels for the same quarter, and if a repeat of that happens we’re looking at well over 80,000 deliveries through December 31, 2018.
In the final analysis, Tesla will have to continue its balancing act of holding steady on expenditure while ramping up Model 3 production and deliveries. If they can remain profitable through Q2-2018, they’ll get the wiggle room to start launching the Model 3 internationally and start production on other products like the Tesla Model Y, the Tesla Semi and the Tesla Pickup Truck – all the while appeasing investors with a healthy and growing bottom line.
“The real question, therefore, is not whether Tesla will be GAAP-profitable in Q3: it is whether Tesla can make 6,000 Model cars a week through the end of the fourth quarter. Q3 has witnessed an intense ramp in Model 3 production. Can they round it off with another record-breaking quarter come December 31, 2018, and truly set the tone for massive expansion domestically and globally in 2019?” – 1redDrop | Oct 1, 2018