Tesla Continues to Struggle but Future Looks Bright

Tesla Model X with Gullwing Doors

History seems to be repeating itself with Tesla Motors as the electric car maker suffered losses yet again during the recently closed quarter. Not surprisingly, it failed to beat analysts' revenue and earnings estimates for the second quarter of 2016 writes Abdul Rafay Khan of Tech News Today.

The electric car maker reported a loss of $1.06 per share on $1.27 billion revenue, missing analysts' $0.52 loss per share and $1.6 billion revenue forecasts.

Tesla announced its first quarterly profit back in 2013. This was the thirteenth straight quarterly loss reported by the company. The loss widened due to an increase in capital expenditure. Despite closing another disappointing quarter, CEO Elon Musk is hopeful about the company's ability to be profitable once it starts delivering cars at full capacity.

Loss for Tesla increased from $184.2 million to $293.2 million on a year-over-year (YoY) basis, whereas revenue during the quarter was up 33% YoY. Cash reserves increased to $3.25 billion during the period, but Tesla has been burning cash by making substantial investments in its Gigafactory.

The increase in cash reserves resulted from the $1,000 deposit that Tesla customers paid to pre-order their Model 3 electric car. During the period, the company also raised $1.7 billion from an equity offering in May. The car maker spent $295 million on its capital expenditure, which resulted in a free cash outflow of $145 million.

In a letter to its shareholders, the company wrote: "Q2 was certainly busy. We completed the design phase of Model 3, increased vehicle production by another 18% sequentially, rolled out the biggest aesthetic and functional update to Model S since its initial launch, introduced an upgradeable 60 kWh Model S, increased automotive gross margin excluding ZEV credits, and completed a $1.7 billion equity raise to end the quarter with $3.25 billion in cash."

During the period, Tesla delivered 14,402 vehicles to its customers; 9,764 Model S and 4,638 Model X, and an additional 5,000 vehicles are still in transit. The car maker had initially planned to deliver 17,000 cars during the second quarter. In total, the company produced 18,345 cars, which reflects an 18% increase from the previous quarter. However, it seems like Tesla would be unable to accomplish its goal of delivering 80,000 vehicles in the current year if it continues production at this rate.

On the brighter side, about half of the total production in the quarter was done in the last month only. This shows that Tesla is ramping up its production effort in order to meet the target. During the first half of 2016, Tesla delivered about 30,000 cars, which leaves the company with 50,000 more deliveries in the latter half of 2016.

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Slow production during the start of the quarter was primarily due to supplier issues. Recently, Tesla parted ways with its autopilot supplier, Mobileye. The company supplied the car maker with its EyeQ technology for its processor. Mr. Musk described this quarter as "hell" for production; however, everything in the production department is back on track.

Tesla's future, including the Master Plan Part 2, for now is dependent on how the company manages the production of its low cost Model 3. Working with suppliers is the main issue that Mr. Musk and his team will have to deal with in the future. With different parts coming from different suppliers, it is difficult to keep production on target. Mr. Musk himself is dealing with the suppliers for now, in order to avoid further delays in Model 3's production.

In the earnings call, the CEO stated that operating expenses would now increase by more than 30% annually. This increase in expenses would be attached with the massive production that is planned for Model 3, as Tesla plans to invest heavily in the car. Capital expenditure is expected to sum up to $2.25 billion this year, so that the company can meet Model 3's demand by next year.

To support its production plan, the Gigafactory is of utmost importance now. Launched last Friday, the Gigafactory will not only make batteries for cars, but also provide solar and wind energy for household consumption. If Tesla can complete the factory and start battery production on time, it could possibly reduce its production costs, as batteries are the most expensive component of any electric car.

Future Outlook

Mr. Musk has laid out a bold master plan; in order to achieve it, the company needs a lot of cash. Master Plan Part 1 will almost be completed when Model 3 rolls out next year. But for the production of self-driving cars, autonomous buses and small trucks, the company needs to invest heavily in R&D and production.

Tesla's mini bus and semi-truck will be unveiled next year. The compact SUV, which has often been rumored to be named Model Y, is the company's next priority after Model 3. The CEO believes that SUVs will garner a 500,000-1,000,000 units-per-year demand. Moreover, Tesla plans to open several new stores around the world, including a few in Seoul, Mexico City and Taipei.

The National Highway Traffic Safety Administration (NHTSA) is probing Model S' May 7 fatal accident due to an error in the autopilot system. The National Transportation Safety Board is also looking into the crash, while the SEC is investigating if Tesla violated the law by not disclosing information about the crash in its public offering.

According to Mr. Musk, the company will continue to improve its autopilot technology and achieve full autonomy sooner than expected. Discussing the fatal accident, the CEO stated: “Tesla can't sneeze without there being a national headline" citing more than 35,200 deaths in road accidents last year in the US that failed to get the same attention that his company did. Abdul Rafay Khan of Tech News Today