Tesla CEO Elon Musk, after reporting a surprisingly large loss in the second quarter, pointed toward an eventual, if delayed, return to profitability and spectacular growth into a truly global company.
“We expect growth to continue for several years to come at the 50 to 100 percent level,” Musk said on a conference call. Such rapid growth stretches the bounds of human comprehension, he said.
“We can only understand an exponential [rate of growth] at a cognitive level,” he said. “If that trend continues, the results will be pretty amazing.” After a pause, he added: “And I think that will continue.”
For now, record sales haven't been enough to generate consistent profits. The company lost $389 million in the second quarter – far more than analysts had projected – even as sales jumped more than 50 percent to $6.35 billion.
Tesla shares plunged 13.6 percent Thursday to close at $228.82.
Automotive gross margins, a closely watched metric, slipped to 18.9 percent from 20.2 percent in the first quarter and 20.6 percent in 2018's second quarter. Itay Michaeli, an analyst at Citigroup, had written that anything much below 21 percent "would support the bear case on Tesla's profitability."
The earnings miss is “calling into question the path to profitability from here,” Ryan Brinkman, an analyst at JPMorgan, wrote in a report. He said Tesla is counting on selling more lower-priced Model 3s to make money, but posited that the car “may be structurally unprofitable.”
Musk and CFO Zachary Kirkhorn said in a letter to shareholders that the company would aim for a net profit in the third quarter, though “continuous volume growth, capacity expansion and cash generation” would be the focus.
In the call that followed, Musk said the company would about break even this quarter and be profitable in the fourth.
Next year, he said the first half will be “tough,” with the second quarter not as bad as the first. Then the second half of the year “will be incredible.”
Tesla ended the quarter with $5 billion in cash and cash equivalents, the most in the company’s history, thanks in part to a sale of stock and convertible bonds that raised $2.4 billion.
Tesla said in the letter that the Fremont, Calif., plant has started preparing to assemble the Model Y crossover, with production to begin by fall 2020. A new factory in China is forecast to begin making the Model 3 sedan before the end of this year. And Musk said on the conference call that he wants to select a location for a European factory this year.
“We remain focused on international expansion, because local production is essential to being cost-competitive,” he said on the call.
Founding executive becomes adviser
In a surprise announcement, Musk said veteran Tesla executive J.B. Straubel would hand off his chief technology officer role to a protégé and become a senior adviser. Straubel is the engineer behind Tesla's battery and has been at Tesla since its founding.
In 2003, he had lunch with Musk and the two discussed advances in consumer electronics and lithium-ion batteries. A fire was lit.
"That was the premise Elon and I discussed over that first lunch: that batteries have come much further than anyone expects, certainly than the auto industry expects," Straubel told Bloomberg 10 years later.
“If we hadn’t had lunch in 2003, Tesla wouldn’t exist, basically,” Musk said on the call.
Straubel insisted he’s “not going anywhere” and expressed full confidence in Drew Baglino, with whom he also had a fateful lunch in 2003 when Baglino was finishing college and seeking direction.
Focus on expansion, product launches
Tesla, which doesn't report sales by country, said its Model 3 outsold "all of its gas-powered equivalents combined" in the U.S. and is approaching volumes of established premium competitors in Europe. Global sales of the most affordable Tesla model totaled 77,634 in the quarter. Tesla said it delivered 17,722 of its larger Model S sedans and Model X crossovers.
Kirkhorn said the average selling price of the Model 3 was down to about $50,000, but margins on the vehicle improved as manufacturing became more efficient.
The company said it has 18 days worth of vehicle sales in inventory, down from 55 a year earlier and 30 at the end of the first quarter.
Tesla reported $117 million in restructuring and other charges in the quarter. It has laid off workers and pledged to close some stores to lower costs. It has also tinkered with its pricing and dropped some model variants in recent months.
The company reaffirmed its sales guidance for 2019 at 360,000 to 400,000.
"We believe our business has grown to the point of being self-funding," Musk and Kirkhorn wrote in the letter, though there may be some challenges around product launches. “We are most focused on expanding our manufacturing footprint in new regions, launching new products and continuing to improve the customer experience, while generating and using cash sustainably."
To that end, Tesla is trimming its capital expenditure budget to $1.5 billion to $2 billion, down from $2 billion to $2.5 billion, citing improved capital efficiencies and delaying some spending.
Reuters and Bloomberg contributed to this report.