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February 5, 2019

Tesla's Road to Profit Remains Tough


I have no doubt that electric vehicles (EVs) represent a disruptive industry. But every disruptive industry that ever existed is littered with the memories of companies that failed to survive the disruption. 
I was using a Netscape web browser and AltaVista search engine before Google – now Alphabet (NSDQ: GOOGL) – even existed as a company. But only one of those companies is a household name today.

There are many who believe that EV maker Tesla Inc. (NSDQ: TSLA) is poised to dominate the electric vehicle industry. It’s fair to say that they do today, but they have racked up net losses in every year the company has been in business. I think it’s likely that Tesla ultimately ends up like AltaVista – a trailblazer that ultimately lost ground to competitors. 

Last week Tesla announced a small profit for Q4, but a loss of nearly another billion dollars for all of 2018. During the conference call to discuss earnings, CEO Elon Musk made a strange remark about demand for the company’s Model 3, which is the best-selling EV in the U.S.: 

“The demand for – the demand for Model 3 is insanely high. The inhibitor is affordability. It’s just like people literally don’t have the money to buy the car. It’s got nothing to do with desire. They just don’t have enough money in their bank account. If the car can be made more affordable, the demand is extraordinary.”

The problem is Musk is conflating desire with demand, but prices can always prevent desire from equaling demand. Tesla has long promised to sell a Model 3 for $35,000, which would be in the ballpark of the average new car price in the U.S. Instead, it has relied on a $7,500 tax credit to get the cheapest Model 3 to $44,000. 

However, after selling 200,000 vehicles in the U.S., that tax credit starts to phase out. From January 1 of this year, Tesla buyers only get $3,750. In July the credit falls to $1,875, before disappearing in 2020. 

This creates a tough road ahead for a company that has struggled with profitability. Meanwhile, the competition is heating up. All major auto manufacturers either have EV models available, or soon will. Some of these cars are more affordable than the Model 3, but Jaguar, Mercedes and Volkswagen are all debuting luxury model EVs to directly compete with the Model 3.

During the call, Tesla lowered capex guidance for 2019 to $2.5 billion, raising questions about whether they can hit their ambitious production goals. Near the end of the earnings call, Musk announced that CFO Deepak Ahuja is retiring. Ahuja had been in his position less than two years following the abrupt departure of the previous CFO.

There’s no doubt that Tesla’s sales will continue to grow impressively this year, but it’s going to be challenging to keep the momentum going. And it will be harder than ever to turn a profit, with mounting competition and tax credits being phased out.
Courtesy of Robert Rapier, Investing Daily (More from Investing Daily Here)  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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