25 Sep

Tesla, Electric Vehicles, and the Profitability Conundrum

WRITTEN BY Mohit Oberoi, CFA
  • Since it went public ten years ago, popular US EV (electric vehicle) maker Tesla has made a net profit in just four quarters. The company has yet to post an annual profit.
  • Achieving profitably in EVs has been a problem for the automotive industry. Yesterday, Chinese EV maker NIO released its second-quarter results, posting a massive loss. The company’s stock fell sharply after its earnings release.

Tesla (TSLA) has achieved a net profit in just four quarters since it went public a decade back. Furthermore, the company hasn’t posted an annual profit. Frequently pointing to the company’s perennial loses, Tesla bears suggest the company could go bankrupt. However, Volkswagen CEO Herbert Diess disagrees. Meanwhile, Tesla bulls point to the company’s strong gross profit ratios and steadily rising shipments.

Sustainable profits have been elusive for Tesla

Making profits in EVs has been an enigma for Tesla as well as the overall EV industry. Yesterday, NIO (NIO) released its second-quarter results. The company posted a worse-than-expected loss in the quarter, and its stock tumbled yesterday. It closed the day down a massive 66% year-to-date. Tesla has been better off and is down 33% this year. Both Ford (F) and General Motors (GM) are in the green.

NIO’s losses

NIO reported a big second-quarter loss. Bloomberg reports NIO has accumulated $5 billion losses in four years. Tesla took 15 years to accumulate that loss. Tesla’s sales volumes are much larger than NIO’s, underlining the fact that it’s not easy to make money in EVs. Despite generous government subsidies, EV makers have found it hard to churn out profits.

Established automakers

It’s not only pure-play EV makers such as Tesla and NIO that are struggling to make money—established automakers also seem to be challenged. Although not many automakers comment on their EVs’ profitability, Fiat Chrysler’s (FCAU) former CEO, the late Sergio Marchionne, once said Fiat Chrysler loses money on EVs. He even said he didn’t want customers buying the company’s EVs, as it loses money on them.

Additionally, in GM’s Q4 2018 earnings call, CEO Mary Barra was asked about the company’s EV profitability timeline. She said, “I would say early next decade, but I wouldn’t put any more specificity on EV profitability than that.”

 A Tesla effect?

Despite challenges, automakers still have big plans for EVs and are investing in them significantly. For instance, Honda Motors plans to sell only EVs in Europe by 2025.

Furthermore, China is aiming to increase EV penetration. Despite US-China trade tensions, the country has exempted several Tesla models from purchase tax.

While views differ on the pace of vehicle electrification, there is an undeniable shift towards EVs. And, thanks to Tesla’s positioning, it looks best placed to capitalize on the trend. The company has been striving for profitability by boosting its shipments and focusing on cost control.

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