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Could Tesla Achieve GAAP Profitability in Q3 2018?

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Tesla’s Q3 2018

In the previous part, we learned about Tesla’s (TSLA) Model 3 production and deliveries guidance and estimates for the third quarter. Tesla CEO Elon Musk is known to set ambitious targets, which can become a challenge for the company to achieve.

During Tesla’s second-quarter earnings event, Musk reiterated his expectation for it to be GAAP profitable in the third and fourth quarters of the year. Let’s take a look.

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Tesla’s road to profitability

In the last two years, Tesla’s (TSLA) GAAP net losses have more than doubled. In the second quarter, the company reported a net loss of ~$718.0 million on a GAAP basis, which was much worse than the $293.0 million loss reported in the second quarter of 2016.

During the company’s second-quarter earnings call, Musk noted, “And from an operating plant standpoint, from Q3 onwards, I really want to emphasize our goal is to be profitable and cash-flow positive for every quarter, going forward.”

Tesla expects to maintain a Model 3 average production rate (XLY) of at least 5,000 units per week in the third quarter. In addition, the company targets to produce an average 2,000 units of Model S and Model X per week in the quarter. This could result in an average production rate of 7,000 vehicle units per week in the third quarter.

Musk added, “So, at a production rate of 7,000 cars a week, we believe we can be sustainably profitable from Q3 onwards.”

Tesla’s profitability plans

According to Musk’s June 12 tweet, in an effort to be closer to its target to be profitable as early as later this year, Tesla laid off 9.0% of its salaried employees. While this might help Tesla reduce its cost burden to some extent, its path to sustainable profitability is still highly dependent on economies of scale and being able to produce vehicles in large volume.

Despite recent improvements, Tesla’s annual car production is much lower than the annual vehicle production of mainstream automakers (XLY) Ford (F), General Motors (GM), and Fiat Chrysler (FCAU). While GM, Ford, and Fiat Chrysler primarily sell internal combustion engine cars, Tesla only sells electric cars.

Continue to the next part to see what a former GM executive recently said about Tesla and what could it mean for investors.

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