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January 18, 2019 | Musk Backslides on Profit Every Quarter Pledge, Will Cut 7% of Workforce

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Tesla shares slide after Elon Musk warned in a blog post that making a profit would be difficult.

Elon Musk sounds a bit more cautious about profitability in his latest Tesla Update. Here are a couple of pertinent snips.

Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels.

I want to make sure that you know all the facts and figures and understand that the road ahead is very difficult.

In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.

As a result of the above, we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn’t any other way.

Another Musk Whiplash

Bloomberg has some interesting profitability quotes in its report Elon Musk’s Whiplash in Tone on Profit Sends Tesla Shares Sliding.

Profitability Comments

  • 2Q earnings call (Aug. 1): “I really want to emphasize our goal is to be profitable and cash-flow positive for every quarter, going forward. I feel comfortable achieving a GAAP income positive and cash flow positive quarter every quarter from here on out. That’s a — there may be occasional quarters, where we pay back a big loan or something, where there may be just because we paid back a big loan. But absent that, it would be cash flow positive.”
  • 3Q earnings call (Oct. 24): “We expect to again have positive net income and cash flow in Q4. And I believe our aspirations I think will be for all quarters going forward. I think we can actually be positive cash flow for all quarters going forward, leaving aside quarters where we may need to do a significant repayment; for example, in Q1 next year. But I think, even in Q1, I think we can be approximately flat in cash flow by end of quarter.”
  • 3Q earnings shareholder letter (Oct. 24): “Our earnings profile has flipped dramatically. Sufficient Model 3 profitability was critical to make our business sustainable — something many argued would be impossible to achieve.”

It’s a mystery why anyone believes anything Musk says.

Mike “Mish” Shedlock

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January 18th, 2019

Posted In: Mish Talk

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