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Tesla is facing a painful dose of reality




<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Through 2017 and 2018, Tesla (NASDAQ: TSLA) showed phenomenal growth, revenue grew from just $ 7 billion in 2016 to an estimated $ 21 billion in 2018. Vehicle performance grew even faster, rising from around 76,230 in 2016 to 245,240 last year Tesla himself became profitable in the second half of 201[ads1]8. "data-response time" "11"> Through 2017 and 2018, Tesla (NASDAQ: TSLA) posted phenomenal growth. Revenues increased from just $ 7 billion in 2016 to an estimated $ 21 billion in 2018. Car supplies grew even faster, rising from around 76,230 in 2016 to 245,240 last year. Tesla even became profitable in the second half of 2018.

But in the background, warnings about the sustainability of Tesla's performance have been built up. Unfortunately, CEO Elon Musk now only understands the extent of the challenges facing the company, which has created an unnecessary crisis for the pioneer of electric vehicles.

Reality hits Tesla

Earlier this month, Musk sent a letter to Tesla employees announcing that the company had to cut around 7% of its full-time workforce. He noted that Tesla is on the right track to enter a second quarterly profit for the fourth quarter, but that will make less money than in the third quarter. Furthermore, he expects that Tesla's earnings will continue to be lower in the first part of 2019.

A Tesla Model 3 parked on a road, with a green field in the background

Tesla performed a surprisingly strong profit in the third quarter of 2018. Image source: Tesla.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The underlying problem is simple. His letter ( via CNBC ), "Although we have made great strides, our products are still too expensive for most." He continued: "data-response time =" 36 "> The underlying problem is simple. As Musk stated in his letter (via CNBC), "Although we have made great progress, our products are still too expensive for most." He continued:

In the third quarter last year, we could earn 4% profit. Although it is little of most standards, I will still consider this as our first meaningful profit in the 15 years since we created Tesla. However, it was partly the result of preferably selling higher priced model 3 variants in North America. … [S] tears around May, we have to deliver at least the middle model 3 variant in all markets, as we need to reach more customers who can afford our cars. Furthermore, we must continue to make progress towards lower price variants of model 3.

Today, the cheapest Tesla you can buy costs is $ 44,000 before the impact of any tax credits. For the first year after the Model 3 sale began, the cheapest option cost $ 49,000. And many customers so far have chosen even more pricy variants. The higher price models are dramatically more profitable for Tesla than a hypothetical $ 35,000 model 3.

As impressive as Tesla's Q3 increase in profitability was that it is not necessarily sustainable unless the company can dramatically reduce production costs or permanently maintain model 3 average transaction prices over $ 50,000.

The signs have been there to see

In the past six months, it has become painfully obvious that Tesla reaches the limits of demand for pricier model 3 variants, at least in its main market in North America.

A silver Tesla model 3 and a red Tesla model 3 on an empty parking lot.

Picture source: Tesla.

<p class = "canvas text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "In July, for example, the company began to potential customers who were willing to pay for a premium version of model 3 to skipped the line of reservation holders waiting for lower prices. In October, Tesla guaranteed that all orders placed by October 15 would be eligible for the entire $ 7,500 federal Electric vehicle tax credit (which was scaled back to $ 3,750 for deliveries in the first half of 2019 and will phase out at the end of this year) and then introduced a slightly cheaper mid-sized model 3 variant . , Tesla implemented a transversal $ 2,000 price reduction in the US earlier this month. "Data Reaction =" 68 "> For example, in July, the company began to show that potential customers were willing to pay for a premium version of model 3 to skip l the inn with reservation holders waiting for lower prices. In October, Tesla guaranteed that all orders placed by October 15 would qualify for a full $ 7,500 federal electric vehicle tax credit that was scaled down to $ 3,750 for deliveries in the first half of 2019 and will phase out at the end of this year ) and then introduce a slightly cheaper medium-sized model 3 variant. In the end, Tesla implemented a $ 2,000 circumference cut in the US earlier this month.

In short, while there was a good demand for $ 50,000 plus model 3s in 2017 and the first half of 2018, Tesla has already taken most of that demand. production rages, it must sell more cars each quarter than it did in the previous quarter. And in the US – Tesla's largest market – the design of the EV tax credit is another headwind.

For now, Tesla has been able to avoid introducing the $ 35,000 Model 3 surplus murder through a combination of tactics listed above and beginning deliveries of pricier variants outside of North America. Yet it is just a temporary solution. At some point in 2019, Tesla must either reduce production or – more likely – make $ 35,000 model 3 available.

A produced crisis

The automotive industry is in any case a tough business. Tesla is faced with the extra pressure of being a young company with a unique business model and strong dependence on just a few products.

Having said that, the allegedly pressing crisis that requires Tesla to cut costs so that it can reduce prices is largely self-imposed. Thanks to the phenomenal growth over the past two years, it has had a good opportunity to increase $ 5 billion, $ 10 billion or more through stock sales or debt issuance to support growth. Musk, however, has been bizarre reluctant to raise capital recently.

If Tesla had a large cash cushion, it could afford to reduce prices evenly, even if it would lead to short-term losses, as long as production costs were declining at the same time. Instead, Tesla tries to steer the needle to scale and reduce costs without incurring significant near-term losses.

Perhaps Elon Musk might pull off another miracle. But if he had been less stubborn to raise capital in 2017 and 2018, Tesla would not need one.

<p class = "canvas-atom canvas text Mb (1.0em) Mb (0) – sm Mt 0.8em) – sm" type = "text" content = " More from The Motley Fool " data-response = "76"> More from The Motley Fool

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " Adam Levine-Weinberg has no position in Motley Fool has a information rules . " data-response time = "84"> Adam Levine -Weinberg has a part of and recommends Tesla. no position in any of the aforementioned shares. Motley Fool owns and recommends Tesla. Motley Fool has a revealing policy.



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