Tesla earnings: Will the electric-car maker report a profit?

Will higher Model 3 deliveries help or hurt profitability?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Electric-car company Tesla (NASDAQ: TSLA) has seen impressive growth in vehicle sales recently. Trailing-12-month deliveries are up 88%, fueled by surging production and deliveries of its lower-cost Model 3. But questions remain about how viable the company's business is as the automaker scales. While its losses have been narrowing and its free cash flow has turned positive, there's still uncertainty about whether this momentum can continue.

Questions linger: With Tesla's growth driven entirely by its lowest-priced vehicle, could the automaker's gross profit margin contract and weigh on profitability? Will spending on more production capacity and new vehicle development hurt free cash flow?

The company's third quarter will provide a timely window into whether or not Tesla's business is showing signs of scalability. When the automaker reports its third-quarter results on Oct. 23, here are two key areas investors will want to look at in order to assess Tesla's business.

Automotive gross margin

One of the key bull cases for Tesla stock is that the company will eventually be able to flex its premium brand and consistently command a 25% gross profit margin on its automotive business. Indeed, the company has said it is targeting a non-GAAP (adjusted) gross profit margin of 25% for combined sales of its Model S, Model X, and Model 3. This target is impressive because it's about the same gross profit margin that Tesla had on its higher-priced Model S and X sales before Model 3 production and deliveries ramped up. Achieving and sustaining this target even as Model 3 deliveries grow to account for a larger portion of total sales, therefore, would imply that Model 3 production is seeing improved efficiency.

Unfortunately, this key metric has been moving in the wrong direction recently, suggesting Tesla is having trouble achieving the economies of scale it believed it could. After its automotive gross margin peaked in the third quarter of 2018 at 25.8%, it decreased to 24.3% in Q4, 20.2% in Q1, and 18.9% in Q2. This means that Tesla's gross margin is moving in the wrong direction as Model 3 deliveries increase.

For this reason, investors should tune in closely to this metric when the automaker reports its third-quarter results. Tesla already announced it delivered a record 97,000 vehicles during the quarter, with nearly 80,000 of these vehicles being Model 3 -- more than any other quarter. Were these increased Model 3 deliveries during the period enough for economies of scale to start materializing, or did the company's automotive gross margin contract once again?

Net income

If Tesla's automotive gross profit margin moves in the wrong direction, the automaker may have trouble meeting its guidance. At the time of the company's second-quarter update, management guided to be profitable in Q3. But the Street seems to have doubts about this target. On average, analysts expect Tesla to report a non-GAAP loss per share of $0.42 in Q3.

If Model 3 gross margin did hit a tipping point of improved efficiency during the quarter, Tesla could surprise investors and report a profit. But given the company's history of losses, there are no guarantees.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

The US election is done and dusted. Is now the time to buy the ASX NDQ ETF?

US stocks continue to march higher this week.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
International Stock News

Why is everyone talking about the VIX Index today?

Fear or greed: Which investor sentiment will prevail today?

Read more »

A young kid with dark glasses rocks out with a guitar.
International Stock News

Why Nvidia stock rallied to a new all-time high on Wednesday

The changing of the guard bodes well for the artificial intelligence (AI) chip specialist.

Read more »

A handsome smiling man sits in the front seat of an electric vehicle with his hands on the wheel feeling pleased that the Carsales share price is going up and the company will shortly pay its biggest dividend ever
International Stock News

Why Tesla stock just skyrocketed

Why is Donald Trump's election victory powering explosive gains for Tesla stock?

Read more »

Man holding up betting slip and cheering along with two friends in front of TV
International Stock News

Elon Musk's big gamble: Will Tesla stock plunge if Kamala Harris wins the election?

The Tesla CEO has been an outspoken advocate for GOP presidential candidate Donald Trump. Will it backfire?

Read more »

Four investors stand in a line holding cash fanned in their hands with thoughtful looks on their faces.
Economy

Up 20% this year. Does the S&P 500 Index have more in the tank for 2024?

Will US stocks hold up after the election?

Read more »

two young boys dressed in business suits and wearing spectacles look at each other in rapture with wide open mouths and holding large fans of banknotes with other banknotes, coins and a piggybank on the table in front of them and a bag of cash at the side.
International Stock News

2 magnificent S&P 500 dividend stocks down 27% to 51% to buy and hold forever

These stocks hold potential to act as growth and income plays.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
International Stock News

One Wall Street analyst thinks this emerging Artificial Intelligence stock could rise 60% in the next year

SoundHound AI is on the doorstep of a big year.

Read more »