In this research note, we look at Tesla’s history of profit promises and the prospect of whether this time could be different.
We’ve heard this one before
While most growth companies try not to draw too much attention to profitability, instead focusing on scaling revenue and market share, Tesla has flirted with the idea of becoming profitable many times. Indeed, a simple review of past earnings conference calls will show a litany of such promises. Here are just a few of the times in the past several years that Musk has explicitly guided for near-term profitability:
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2011: “Even if we raise no additional funds at all, we have sufficient availability of capital to complete the Model S program and reach profitability. I think this is perhaps – it would be really explicit about that.”
2012: “And, of course, next year profitability and positive cash flow, that would be nice.” (CFO Deepak Ahuja concurred: “We feel pretty comfortable that we have sufficient liquidity to get to profitability next year.”)
2013: “Well, maybe I’m hedging to much. I just don’t want to be overconfident to really – I do think we’ll be profitable in Q2 and subsequent quarters, too. But I guess rather than sort of an absolute commitment, I would say I’m just really having confidence, if that’s being the case.”
2014: “The aspiration of everyone at Tesla to be profitable in subsequent quarters as well, and I’m cautiously optimistic about that. But I don’t want to commit to it until I know more, whereas ready committing to Q1 and I think cautiously optimistic about Q2 is a way to about it.” (Ahuja: “We definitely should be profitable on a non-GAAP basis, even in Q1.”)
2015: “I mean, we could easily get to 10%, 15%. I mean probably if we pushed – if we – somewhere between 10% and 15%. Because I mean we’re talking about gross margin that this year will probably – by the end of the year be somewhere around 30%. So then if 20 of those points go to sort of fixed cost and R&D and whatnot, and then we have 10% left over for book profitability. And we are expecting to be be non-GAAP profitable…And I’d like to emphasize that doesn’t mean bullsh*t profitable, it means really profitable."
2016: “Well, if you exclude Model 3 CapEx ramp, then – well, in fact, really for Q3 and for Q4, Tesla would be profitable, excluding the Model 3 CapEx ramp.” (Ahuja: “I’ll just close by saying my mandate from Elon is clear: Cash is kind. And there’s some real steps that we’re taking as a company to get ourselves to net cash flow positive for the year.”)
2017: “It’s within our control. I mean, like, if we were to just level off, we could be cash flow positive right now. Obviously, we’re in the sort of low to mid-20s on gross margin in the car. At a $10 billion a year run rate, that’s $2 billion to $2.5 billion. So we could definitely be profitable and cash flow positive at that level, but then our growth rate would be way slower.”
As anyone following Tesla will realize, none of these promises came to fruition. The company has continued to incinerate cash right up through the second quarter.
The latest promises
That brings us to 2018. Once again, Musk and company are promising profits just around the corner. Specifically, the latest goal is to be profitable and cash flow positive from the third quarter onward.
On the first-quarter earnings call, Musk had this to say:
“2018 is likely to be a very big year for us. At some point in 2018, we expect to be begin generating positive quarterly operating income on a sustained basis, operating 5,000 a week of Model 3 production. And I am cautiously optimistic that we will be GAAP profitable. It’s not certain, but it’s – I’m cautiously optimistic that we will actually be GAAP profitable with no asterisk…
“We are not far from Q3. And I’m – actually, my CFO and my General Counsel, like, you have to watch what words you use in these situations. But I think we – it’s really looking like we are going to have positive GAAP net income next quarter and as well as positive cash flow in Q3 and Q4. And we, as I’ve said before, do not expect to need to raise any incremental debt or equity.”
The guidance for third-quarter profitability continued in Tesla’s second-quarter earnings report. Musk likewise continued to project confidence on the earnings call:
“So – and from an operating standpoint, from Q3 onwards, we’re going to emphasize, our goal is to be profitable and cash flow positive for every quarter going forward. Now obviously, if there’s a big recession or there’s a severe force majeure event that interrupts the supply chain, that’s not always possible. But we’re confident that – and provided the economy is roughly were it is today, reasonably good and there’s not a big force majeure event that we – I feel comfortable achieving the GAAP income positive and cash flow positive quarter every quarter from here on out. It’s – I’ll just say, the major occasional cause is we’ll pay back a big loan or something were there may be – just because we paid back a big loan. But absent that, we’d be cash flow positive.”
So this is the latest promise of profitability. Will it be different this time?
History rhymes
We will address the specific plausibility of Musk’s latest profit projection in a subsequent article in which we will examine a few models that attempt to demonstrate how Tesla could turn a profit. Ultimately, even the wildest optimism seems insufficient to tip the struggling automaker from deep red into the black.
For now, examining Musk’s latest pronouncements in light of past guidance, choosing to believe in imminent profit, looks like sheer folly. Tesla continues to eat cash as it scales the Model 3 sedan, while at the same time facing declining demand for its higher-margin Model S and Model X vehicles, massive debt obligations and mounting competition.
Investors would be wise to take Musk’s promises with a grain of salt.