Tesla is Back in The Black

Industry |

Elon Musk’s Tesla was able to post a $143 million net income in the third quarter because of its best-ever quarterly deliveries, sales of emissions, and lower operating costs – an income that beat just about everyone’s expectations.

In after-hours trading on the news, its shares jumped 20%. Though the earnings per share were 80 cents on a GAAP basis, lower than what it was a year ago, according to a survey by Bloomberg, the earnings were much better than the majority’s expectations for an adjusted loss per share of 24 cents.

Yes, revenue is down to $6.3 billion compared to the $6.82 billion it was a year ago, but they still made money; the consensus expectation was $6.45 billion.

“Despite reductions in the average selling price of Model 3 as global mix stabilizes, our gross margins have strengthened,” the company said in a results letter “Additionally, operating expenses are at the lowest level since Model 3 production started. 

As a result, we returned to GAAP profitability in Q3 while generating positive free cash flow. This was possible by removing substantial cost from our business.”

The Upside of Being All Electric

The sale of $134 million of emissions credits to other carmakers in the quarter helped to heighten automotive sales as it is basically free money that Tesla generates by producing only electric cars. These emission credits are often what determine the company’s general profitability.

Analysts were concerned that Tesla’s reliance on the lower-cost Model 3, which sells for more than $40,000 with options compared to about $100,000 for Model S sedans and Model X crossovers, would further reduce its closely watched gross margin, despite the fact that they delivered a record 97,000 electric sedans and crossovers during the quarter that ended in September and built 96,155 vehicles. 

Turns out the analysts’ fear were unfounded. Tesla’s gross margin for its automotive business improved to 22.8% in the third quarter, up from 20.6% a year ago and 18.9% percent in 2019’s second quarter.

"Domestic sales might be down but the company has sustained steady demand for its vehicles in spite of waning federal tax credits and the introduction of a slew so-called 'Tesla-killers' this year,” Jeremy Acevedo, Edmunds’ senior manager for industry insights, said by email.

In late Nasdaq trading, Tesla shares jumped more than $50 to $306.55 at 7:06 p.m. in New York. The stock was little changed as it was ahead of the results, ending regular trading down less than 1% at $254.68.

“We demonstrated another quarter of strong free cash flow, despite a significant increase in our captive leasing mix, and sequential entries in capex spending” CFO Zach Kirkhorn said in a results call with analysts. “We exited the quarter with the highest quarter-ending cash balance ever. We have just over $5.3 billion.”

In addition, the company restated the low end of its full-year delivery goal, which is to get at least 360,000 vehicles to customers this year. Musk said deliveries had the potential to hit 400,000 units last quarter.