How Much Production Ramp-Up Will Tesla Need To Break Even?

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Tesla (NASDAQ:TSLA) has been an interesting case in the public markets. Despite the company burning huge amounts of cash, investors remain confident in its prospects. Although Tesla’s net loss was $2.24 billion in 2017, its current stock price is not far below its all-time high. So how does Tesla reach break-even? The simplest answer is that the company either has to ramp up its production to a point where economies of scale allow it to become profitable, or it has to increase its vehicle prices, which we believe might not go over well with prospective buyers. We have created an interactive dashboard that allows users to modify assumptions such as vehicles delivered, increment net margin of additional vehicles that Tesla produces, and pricing to show two scenarios in which Tesla could break even. Pricing Vs. Production

One of the ways in which Tesla could break even is by significantly increasing its vehicle output, which is what the company is currently attempting to do. Tesla plans to manufacture nearly 10,000 electric cars per week in steady state, but it is currently not close to that number. It now plans to produce 2,500 Model 3 cars per week in Q1 2018. However, it won’t be surprising if Tesla misses that mark, given the production issues it has encountered in recent quarters. In our interactive model, we estimate that Tesla will have to ramp up its annual vehicle deliveries by at least 120% to break even, assuming that these incremental vehicles have 20% net margins. Net margins for automotive companies such as Ford and Toyota are around 5%, but we assume 20% for incremental Tesla vehicles because incremental fixed costs will be fairly low, so incremental profits should be meaningfully higher than overall margins typically seen for automotive companies. Tesla could also become profitable if it increases its average pricing by 30%. However, that might not go over well with potential customers, considering recent delays in production and deliveries. Further, substantial pricing increases could have an adverse impact on sales.