Can Tesla Deliver A Profit In The Second Half Of This Year?

Tesla (NYSE:TSLA) published its Q2 2018 results on Wednesday, posting its largest-ever loss, although it beat market expectations on revenues, as sales of the Model 3 mass-market sedan gathered pace. The company provided a relatively upbeat outlook, indicating that it would turn profitable over the second half of the year while generating positive cash flows.

View our interactive dashboard analysis which outlines our expectations for Tesla in 2018. You can modify any of our forecasts or key drivers to see how changes would impact the company’s projected results or valuation.

Model 3 Ramp Gathers Pace

Tesla reached its target of producing 5,000 Model 3 cars per week towards the end of Q2 2018, and indicated that it repeated this weekly production rate multiple times through July, while also producing 2,000 Model S and X vehicles. Although Tesla bet a bit too heavily on the automation of production of the Model 3 on its GA3 assembly line, it has been carrying out more manual tasks in the interim while setting up a general assembly line (dubbed GA4) housed under a massive tent at its Fremont facilities to address short-term production needs. The company is looking to iron out these issues, and scale up production to 6,000 Model 3s by the end of August, with plans to eventually produce 10k vehicles sometime next year.

Tesla’s Margins Should Improve, With Cash Flows Turning Positive

The increased scale has allowed the company to post positive gross margins on the Model 3, and it has indicated that gross margin for the sedan should grow to ~15% in Q3 and ~ 20% in Q4, driven by a continued reduction in manufacturing costs and an improving product mix. Tesla is prioritizing more expensive versions of the Model 3 sedan with premium interiors and extended range over the base $35,000 model, for which it has yet to begin deliveries. The company also began producing a more pricey dual-motor version of the vehicle in late Q2. While Tesla could begin selling lower-spec versions of the car by the second half of 2019, it has indicated that cost savings from greater scale should more than offset the normalization of the Model 3 average selling price. Separately, the company has also been cutting costs, laying off about 9% of its staff as part of a restructuring plan, that it said would eliminate duplicate roles. Capital expenditures are also expected to drop to under $2.5 billion this year, from around $3.4 billion last year.