Tesla Hopes To Turn Industry Upside Down With An Unheard Of 25% Profit Margin On New Model 3

Loving the new TeslaSpies website, don't you? ;)

Yeah, AutoBlog Green must have moved here.

Again - that depends on how TESLA defines the term - Gross Margin. They cannot actually claim a positive margin of any type so far - they have never had a profitable quarter. If the "Gross margin" on the Model S cannot result in a NET PROFIT - this would simply put them out of business quicker

Well, that is a flat out lie. They had two profitable quarters, the last one was Q3 2016. They also had a positive gross margin almost every quarter of existence: https://ycharts.com/companies/TSLA/gross_profit_margin

The margin is being invested into additional capacity, and rightfully so. If the demand is there, you would be stupid to throw away sales by not being able to build enough product. When the growth in demand tapers off, that would be the time to scale back on CAPEX (see Amazon and Salesforce.com as examples).

Again - a positive "Gross Margin" as YOU define it - simply is meaningless - and as far as the quarterly profits - I am wrong and I apologize - BUT - their profits were hardly something to write home for - and were completely wiped out within a month - and they have NEVER made a yearly profit.

The reason why a "Gross Margin" is wrong is simply because a company still had to pay the bills - and the idea that someday the cost of R&D will go away simply is not true - Future products will need just as much R&D to stay ahead of the competition (If they ever were). AND - while the cost of the WALLS of the factory will eventually go away - new models will require continued investment in new tooling and equipment as well. So - to somehow eliminate these items from consideration is clearly misleading to investors.

As far as how they have invested their money - we have no idea that they have invested in increased capacity - since the original plans for the Giga Factory were so Lavish that a need for more capacity has not been established. They have invested some of their money into purchase of a Solar Company that - on surface - has little connection to their car production as well.

Purchasing the SolarCity is vertical integration, it would be like a traditional car company owning the supply chain for gasoline. Cost of sales will go way down since they will leverage the Tesla stores for selling this along with their grid storage products (PowerWall).

As for gross margin, I have to at least partially agree with you. Scale is the big variable. Sure R&D costs will likely never go down, but if they sell 10 times as many cars in two years, R&D will not be 10 times greater. Same with the factory costs as they make manufacturing more efficient and are already paying for some of the capacity they will need in 2018 (ex: paint factory and pressing equipment was already upgraded to support 500,000 cars/year).

Looked at the Powerwall for my solar system. Its way too expensive to have a reasonable ROI at this point. Plus the thought of a lot of potentially explosive lithium batteries constantly recharging (when they can be unstable) in my basement didn't excite me, or my insurance company. At best the Powerwall is an industrial product.

EXACTLY!! Wonder if they allocated any of their massive overhead costs. Doubt it!!!

Gross Margin is not profit. "Gross margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially). Gross Margin is often used interchangeably with Gross Profit, but the terms are different."

To get profit after gross margin one has to subtract R&D, Marketing/Sales/Administrative (SMA), and expenses like that, which for many direct sales tech companies runs about 30% of revenue, so a 25% gross margin results in a 5% loss, not a profit.

Because the rest of the auto industry uses dealers, sales costs are above their revenue line, so a 25% gross margin or less lets them cover marketing R&D and admin. and still make a profit.

IF Tesla does make an operating profit (gross margin - SMA+R&D) and ergo might have taxable income they have huge losses to carry forward. They won't pay any taxes for years.

I - in that case - then the TITLE of this thread is again wrong

And

2 - It really makes NO difference what the Gross Margin is - because as a company - you still have to pay for all the other expenses before you come to the bottom line. And unless you actually post a profit- eventually you will not stay in business.

I have to wonder, Tesla have not had a "profit" but yet they are still in business after what, 14 years? How is that possible? Can someone explain that to me?

Amazon reported losses for 20 years in a row as they were heavily investing and building their empire. Now they have no meaningful competition, a half trillion dollar market cap, and clearing billions of profit. This is how Silicon Valley companies roll... (except Amazon is in Seattle).

The Problem with comparing Tesla with Silicon Valley is that - most of the start ups in Silicon Valley go Bankrupt before their 5th year. That is how Silicon Valley companies roll.

As far as Amazon - retail sales are cyclical - and people eventually move on to new suppliers - or can go directly to the source to bypass Amazon. Just as Sears was passed by KMart which was passed by WalMart - if the Wages go up as Trump has predicted - that has a negative effect on retailers such as Amazon who depend on heavily discounted sales.

Tesla in no way compares to Amazon(Who is basically a retailer - not a producer- with exceptions) - whose sales include a large percentage of sales supplied by third parties - and includes literally Tens of Thousands of Brands made by third parties. Tesla must depend on ONE brand - and hope that they can maintain their policy of no price negotiation under what is a coming deluge of competition from other companies who have a far larger position in the market. While Amazon - being on the Internet - has effective reach to almost all Americans - the policy of having only company owned stores limits Tesla badly in comparison to other Auto companies as well.

Cash flow. A start up depends on raising cash to fund all the costs. As long as there are investors/bankers willing to put in or loan new/more money into the firm they can exist, and don't have to make a profit. The cumulative losses show up on the balance sheet as negative retained earnings, offset by investments and long term debt. At the end of 2016 Tesla had some $ 7B in long term debt, $4.5B in stock investments, and minus $3B in retained losses. The crunch comes when they have to repay the debt and can't sell new debt to raise cash, or the value of the stock goes down at a time when they need to sell more to raise cash. The balance sheet is the key document, less so the P&L statement.

ON the profitable quarter, wasn't that due to selling electric car credits to the ICE car companies? It had nothing to do with selling Teslas.

If Tesla does not need to make a profit to stay in business and they get their cash from investors, what do investors get out of considering Tesla does not make money for them?

Investors are either betting on the future eventual profitability, or that they can get into the stock and then sell it someone else who places a even higher value on the stock. There will always be folks who think its the next Apple, Amazon, etc. and buy it, until it either is, or something happens and a bunch of people get burned. Its all a crap shoot.

@F1_Driver asked "what do investors get out of considering Tesla does not make money for them ? "

Two most common ways to make money by investing (buy and hold long term) are by (1) stock price appreciation, and (2) dividends.

Dividends are popular with mature companies with large profits but slow growth. Ford, for example, offers ~5% dividend but its stock price has gone nowhere. In fact, Ford stock price has dropped 17% over a 1-year period to date. Its outlook for the year is not bright either.

On the other hand, growth companies which have cutting edge technology and products, great brand appeal, relatively healthy cash flow (not necessarily positive) and heavily re-invest their cash to business expansion tend to have their stock price appreciate by leaps and bounds - think Google, Amazon, Facebook, ... and certainly Tesla. All investors who bought more than a month ago and have held on to these stocks stand to make money today. Of the 4 stocks mentioned (GOOG, FB, AMZN, TSLA) the lowest performing over the last 5 years is Google at ~300% and the best performing is Tesla at ~1200%. For comparison, Ford moved up 10% over the same 5-year period (its dividends add up to another 25%-30%.

So if you want safety, invest in Ford for its dividends. If you want excitement, try the growth companies instead.

@Vette71 wrote "Its all a crap shoot". That's a grossest generalization I've heard.

The top 5 tech companies (Apple, Google, Microsoft, Amazon and Facebook) have a combined market cap of 2.88 TRILLION dollars based on today's stock price. That's a lot of crap shoots for those who invest in them. You must not have heard of the term "due diligence".

Even Warren Buffett now regrets not investing in some of these companies in their early days.

Um, excuse me but GM, Ford, and Chrysler were the ones on the Federal Welfare program and we lost billions due to the bailout. Tesla paid back their loan, the ZEV credits are meaningless and actually hurt Tesla versus competitors (they sell them for 30% of their value versus current automakers that can recognize 100%). The $7,500 federal rebate applies to all companies, and it will expire for Tesla next year before anyone else. When that happens, other manufacturers will have a $7,500 advantage until they sell 200k EVs, and that will take a while. So get over yourself.

Ford was NOT bailed out. Get your facts straight.

Okay, you are right that we did not lose money on Ford although they still did get a loan very similar to Tesla:

"Congress decided that the best alternative for Ford was to get funds from the Term Asset-Backed Securities Loan Facility (TALF), which is a government program for auto, student, and other consumer loans. These were very low-cost government loans to the tune of $5.9 billion that helped Ford tip-toe past bankruptcy and overhaul their factories to bring out more fuel-efficient technology."

They did pay back their loan as well, kudos to Ford.

Huh? In craps there are winners and losers. You picked know winners. Ones that have a long existence. Back when they were the age Tesla is today, there were other companies people bought into that didn't make it.