Tesla delivered a rare third-quarter profit on Wednesday, pushing up the automaker's shares by as much as 20 percent in overnight trading — but industry observers are still wondering whether the Californian upstart can keep momentum building as it juggles launching new products and opening an assembly plant in China.
The company reported revenue of $6.3 billion for the third quarter, slightly short of the expected $6.33 billion, according to estimates from Refinitiv.
“Q3 was obviously a very strong quarter,” Tesla CEO Elon Musk said during Wednesday's earnings call. “We had record deliveries. We were able to make great strides controlling our costs. Our operating cost is now at its lowest level since Model 3 production started.”
Tesla has been profitable barely a half-dozen times since it went public in June 2010, and any time it does show black ink, investors rally. Its shares closed at $254.68 on Wednesday, then surged nearly 20 percent in overnight trading, peaking at $308.40 before leveling off.
Whether the celebration will continue after Thursday's market close, never mind in the weeks and months to follow, is uncertain. Tesla will have a lot to prove going forward.
“We acknowledge this was an outstanding quarter,” analysts with Evercore ISI wrote investors after Tesla reported its Q3 earnings. But they tempered their optimism, adding “we remain concerned on 2020 momentum/profitability.”
Long-time Tesla-watchers understand the reason for that caution, considering the way Tesla delivered a strong finish during the second half of 2018, only to sink back deep into the red during the first half of this year. The question is whether it has learned its lessons.
Earlier this month, Chinese authorities took the first step in authorizing Tesla to fire up its new factory outside Shanghai. Production is expected to begin in a matter of weeks, perhaps even days. The $2 billion plant took just 10 months to erect, and now has to prove it won’t see a repeat of the “production hell,” as Musk called it, at the company’s assembly plant in Fremont, California, when the Model 3 was launched in July 2017. China is the world’s largest electric vehicle market, and a smooth start-up could all but ensure Tesla will stay in the black going forward.
The Shanghai plant will start out building a Chinese version of the Model 3 with a target of assembling 1,000 a week by the end of this year. But Tesla will add the all-new Model Y at both of its assembly plants next year. Musk has signaled the all-electric SUV will become the company’s most important product in a global market rapidly shifting from sedans to utility vehicles, potentially outselling the Model 3 sedan by two-to-one.
On top of the challenge of getting Shanghai into production, Tesla will have to make sure that the debut of the Model Y goes off on schedule. It has a history of running as much as two years behind on product launches — and though the Model 3 was on target, cutting corners resulted in the production nightmare at the Fremont plant. And even as operations there finally got on track, it took months more for Tesla to resolve quality problems, especially poor fit-and-finish of body panels.
“You could see the gaps all the way from the moon,” Sandy Munro, a Detroit-based manufacturing specialist, said at the time.
The launch in Shanghai and the debut of the Model Y are just two of the many challenges Musk has ladled onto Tesla’s plate. The company is pushing forward on several other closely watched products, including an all-electric pickup, a heavy-duty semi truck, and a revival of its original product, the Tesla Roadster. Delays or quality problems with any of these could cause serious headaches.
The automaker also continues teasing an eagerly anticipated updated of its semi-autonomous Autopilot technology that could let vehicles operate hands-free under a wide variety of conditions. That also could come in a matter of weeks, though there are plenty of skeptics, including Apple co-founder and tech guru Steve Wozniak who, on Wednesday, told a conference audience in Las Vegas that Tesla has repeatedly “suckered me in,” with its promises of the hands-free Autopilot system.
“Overall, we are turning the corner,” Musk said during Wednesday evening’s conference call.
Of course, he was also bullish last year after the company posted two consecutive quarterly profits, only to have the bottom fall out with a record first-quarter deficit. And beyond the challenges of getting everything right internally, Tesla faces increasing external pressures. By early next year, it will face new competition in the long-range battery-car market from Ford, Volkswagen, Porsche and others. But even as new entries come to market, Tesla has so far remained overwhelmingly dominant in the EV sector.
Of all the challenges facing the company, it will be the Model Y that Tesla most needs to get right, said Jeremy Acevedo, a senior analyst with Edmunds. If the launch goes off as planned, “It will no doubt be a positive step.” But he adds that “questions remain” to be answered before Tesla really can say it has turned the corner.