Can Tesla Break Even in the Third Quarter?

  • Popular US electric vehicle maker Tesla has scheduled its third-quarter earnings release for October 23. The company reported record deliveries in the quarter. However, it fell short of the 100,000 deliveries CEO Elon Musk was reportedly targeting.
  • During the company’s second-quarter earnings call, Musk said that Tesla could be nearing break-even levels in the third quarter. Analysts expect a small loss for the company in the quarter.

Tesla’s third-quarter earnings

Tesla is scheduled to release its third-quarter earnings results on October 23. Earlier this month, the company released its third-quarter delivery data. It delivered around 97,000 cars in the quarter—a fresh record. Now, it’s debatable whether deliveries were better or worse than expected. A month before the announcement, analysts were somewhat bearish on Tesla’s third-quarter deliveries. However, a leaked email showed that Musk was aiming for 100,000 deliveries in the quarter.

Executives often push for higher numbers, so Tesla missing on 100,000 deliveries shouldn’t really have come as a big disappointment for the markets. Nonetheless, the stock was punished after reporting its third-quarter deliveries.

The profitability conundrum

Now, let’s drill down into another important factor: profitability. In the second quarter, Tesla reported record deliveries. However, it ended up posting a generally accepted accounting principles loss of $408 million. The figure included $117 million of restructuring and other charges. While Tesla’s second-quarter deliveries were better than expected, its loss was also wider than expected. Given this background, what should we expect in the third quarter? Let’s discuss this in perspective.

Tesla’s third-quarter: Can it break even?

During Tesla’s second-quarter earnings call, Musk said he expected Tesla to be near the break-even level in the third quarter and generate a profit in the fourth quarter. He added that he felt “pretty confident about that.” Analysts polled by Thomson Reuters expect Tesla to post net losses of $256 million in the third quarter and $87 million in the fourth quarter. However, on an adjusted basis, analysts expect the company to post a net loss of $78 million in the third quarter. They expect it to churn out an adjusted net profit of $82 million in the fourth quarter. The adjusted numbers look to be in line with Musk’s views.

The fourth-quarter question

The fourth quarter could be much stronger for Tesla. Starting next year, the company’s vehicles will no longer be eligible for a federal tax credit. This change could lead to higher US deliveries in the quarter, as US customers are expected to expedite their purchases to take advantage of the tax credit. In the fourth quarter of 2018, Tesla benefited from this trend as customers brought their purchases forward. Tesla cars were eligible for a lower federal tax credit starting this year. The tax credit fell further starting in July. Incidentally, Tesla posted net profits in the third and fourth quarters of 2018. Overall, the company has been profitable in only four quarters since it went public a decade ago.

With that said, 2020 could be an interesting year for Tesla. In the US, its cars will no longer be eligible for a federal tax credit. However, its China Gigafactory is expected to ramp up its operations. Its Model Y production is also expected to begin next year. The company’s Model 3 and Model Y are expected to drive its growth in the medium to long term.