Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Monday, April 16, 2018

Tesla to be profitable in Q3 and Q4

Tesla has been critical to the growth of electric cars.  The Tesla Roadster surprised petrol-heads with its acceleration, quietness and smoothness.  The Model S showed that electric cars were very much not golf or milk carts.  This is not to dismiss the Nissan Leaf, which was the first and so far the best-selling mainstream electric car released.  But Tesla made electric cars sexy.  Then Tesla built its gigafactory in Nevada which was designed to drive down the cost of batteries, so that Tesla could produce the Model 3 which costs the same as the average American car even without subsidies.  Even though the gigafactory isn't finished, the cost of batteries has halved over the last 3 years.

So far, apart from a couple of quarters, Tesla has made losses every quarter.  People forget that Amazon was massively loss-making at the beginning too, and look at it now.  As a general rule, rapidly expanding businesses tend to be cash flow negative.  Make no mistake, if Elon Musk dumped his goal of transforming the world of energy by introducing cheap storage and sexy, affordable electric cars,  Tesla would be making handsome profits now and would have been for the last couple of years.  The most recent losses and cash outflows have come from the retooling cost of setting up the Model 3 assembly lines in Tesla's Fremont (near San Francisco) factory.  And of course, with limited sales, the cost has to be spread over low output, and, because sales are low, cash flow is negative. 

Musk announced on Twitter (how else?) that in Q3 and Q4 this year, Tesla would be both profitable and cash flow positive.  Now, this is a communication from the CEO of a listed company.   Which means there would be major legal implications if he hasn't done his sums properly and gets it wrong.  The chances are very high that he will be correct.  Though he doesn't say how profitable or how positive cash flow it will be, clearly it's a big improvement on losses and negative cash flow.  And the reason for Musk's confidence is the rapid expansion in Model 3 production, as Bloomberg's Tesla Tracker in the chart below shows.

Aside from all the usual problems of introducing a totally new production line, the Model 3 had three particular issues.  First it was the first Tesla car to be made of steel not aluminium.  That required a learning process.  Second, battery production at the gigafactory was massively behind schedule because of failures by a sub-contractor.  That problem has been resolved by taking that part of the production process in-house.  Musk recently said that the waiting list for the Tesla Powerwall battery is now down to 3 to 6 months.  Third, Musk wanted a completely automated production line, and that didn't work.  He found that skilled and motivated humans were more adaptable and more productive in partnership with a mostly automated production line.  It's instructive how rapidly the failing production system was reworked into a working one--a mark of Tesla's Silicon Valley origins.

Tesla is moving into profitability and positive cash flow.  Tesla bet the house on cheaper batteries and the Model 3.  It's winning its bet.

The EV revolution will continue.

As an aside, my expectation is that when Tesla is profitable, it will again start cutting the cost of its Powerwall batteries, either  by upping the storage capacity while keeping the price unchanged (as it did 18 months ago), or by cutting the price for unchanged capacity.

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