Tesla shares soar on news factory in China has started operating
CEO Elon Musk is optimistic that the Shanghai factory can start delivering Model Y vehicles by the middle of 2020
San Francisco — Elon Musk flipped the script on those who doubted Tesla could return to profitability and meet aggressive timelines, delivering positive earnings few saw coming and declaring he’s ahead of schedule on a new plant and product.
The electric-car maker earned $1.86 a share in the third quarter, exceeding the most optimistic projection by a wide margin and beating the consensus estimate for a 24 US cents loss.
On top of that, Musk peppered investors with positive updates: Tesla’s new factory in China is already starting production, the Model Y crossover will be launched months earlier than expected in 2020 and the long languishing energy business is showing signs of life.
It all added up to a report that broke the mould for Musk, who is notorious for setting stretch goals that take longer to pull off than he plans. Tesla still faces challenges: quarterly revenue fell for the first time since 2012, and the company has posted the occasional profit in the past that it’s been unable to sustain. But after reporting reined-in expenses that padded gross profit margins, the shares climbed in pre-market trading to levels last seen almost eight months ago.
“If you look at the margins and the profitability, that’s the major feather in the cap for the bulls,” Dan Ives, an analyst at Wedbush Securities, said on Bloomberg Television. “If they can maintain this, this could be a potential game changer for them going forward.”
Tesla shares soared as much as 19% to $301.89 pre-market in New York. The stock was down 23% in 2019 to Wednesday’s close. The company’s 5.3% bonds rose 2c on the dollar to 93.75c, according to Trace, the highest level since March 2018.
Trial output of the Model 3 is under way at the factory Tesla began building early this year on the outskirts of Shanghai. Producing the sedan locally enables Musk to charge less for the car by avoiding import duties. The factory “opens up a whole new market” for the company, said Gene Munster, a managing partner at venture capital firm Loup Ventures.
Production and deliveries of the Model Y, which shares underpinnings with the Model 3, will start in the northern hemisphere summer of 2020, rather than the autumn. Musk — never one to back down from outlandish predictions — said the crossover could outsell the Model S, X and 3 combined.
A new Tesla pickup, which Musk has teased on Twitter and said could be unveiled in November, is the company’s “best product ever”, he told analysts on the earnings call.
The CEO was as candid as he’s ever been about the extent to which Tesla is no longer focused on the high-priced Model S and X, both of which can sell for six figures, calling them “really niche products”.
“To be totally frank, we’re continuing to make them more for sentimental reasons than anything else,” he said. “They’re only of minor importance to the future.”
For all of Musk’s nonchalance, the pivot towards lower-priced cars at the expense of pricier models has been financially taxing. Revenue fell to $6.3bn in the third quarter, missing analysts’ estimates and dropping from $6.8bn a year ago.
Earnings improved in part thanks to the company recognising about $30m of deferred revenue based on Musk making a controversial addition to its suite of drive-assistance features known as Autopilot. Smart Summon, which allows Tesla owners to tap their smartphone and remotely call for their car to pick them up, was rolled out to customers through an over-the-air update days before the end of the quarter.
“The business model is slowly shifting to high-margin software,” Loup Ventures’ Munster said.
Musk has been charging customers for performance features that Tesla vehicles aren’t actually capable of yet. At the end of June, the company said it expected to recognise $567m of deferred revenue in the following 12 months. It’s now anticipating the release of almost $500m tied to the roll-out of Autopilot and “Full Self Driving” features, according to the statement, which doesn’t give a time frame.
Tesla’s gross margin in the third quarter was 22.8%, down from a year ago but a 3.9 percentage point improvement from the prior three months.
“The balance sheet is good, demand’s good and gross margins beat expectations across the board,” said Ben Kallo, an analyst at Robert W Baird who recommends buying Tesla shares. In the coming days, he predicted, “you’ll also see a lot of short-covering.”