Tesla Extends Its Profit Run, Promises Record Production

Tesla on Wednesday posted the second quarterly profit in a row on record vehicle deliveries and said it would produce more than 500,000 units this year, as the electric carmaker's shares surged to new highs.

Shares rose 13 percent after hours, reaching an all-time high and for the first time cracking the $600 mark as Tesla promised to "comfortably exceed" half a million deliveries, an increase by more than a third from the 367,500 it delivered last year.

Tesla on Wednesday said the manufacturing process at its new Shanghai factory was running as expected and said it would increase production of its mass-market Model 3 due to strong demand in China.

The company also said it has started production of its new Model Y, an electric crossover utility vehicle, at its Fremont, California plant this month and plans to deliver the first models by the end of March, ahead of schedule.

Wednesday's results suggest Tesla is looking at a more steady chapter after several tumultuous years marked by steep losses, production troubles and clashes with US regulators.

And while Chief Executive Elon Musk made unusual comments during Wednesday's investor call, he avoided any embarrassing episodes that led him to apologize to Wall Street analysts in the past.

Investors overall are betting that Tesla has overcome its many struggles and can compete with larger, better-capitalised rivals to lead the industry on technological innovation for the next generation of cars.

Their approval also is a boon to Musk personally after his mercurial behavior and a series of scandals and public outbursts forced him to step down as chairman.

Cost efficiencies and high production volumes should allow Tesla to ultimately reach industry-leading operating margins, the company said on Wednesday. It reported a 4.9 percent operating margin in the fourth quarter.

That Tesla is already starting Model Y production in Fremont was the most notable item in the release, Roth Capital Partners analyst Craig Irwin wrote in a note.

"For a company that has always been late, this is a big improvement," he said.

Tesla initially did not expect to make the Model Y until late 2020 and then moved up its forecast to this summer and then beat even that deadline by several months.

Tesla's cost efficiencies become apparent when comparing revenue and profit on a per-vehicle-basis. A review of Tesla's results showed that even though revenue per unit delivered rose by only 3 percent on a quarterly basis in the fourth quarter, operating profits per vehicle rose by roughly 19 percent in the same time.

Tesla is also trailing luxury carmaker rivals on steady profits per vehicle, a key metric closely watched by auto professionals to compare companies across the industry.

Tesla's stock has more than doubled in value since the company posted a third-quarter profit, beat estimates for 2019 vehicle deliveries and ramped up production at its Gigafactory in China.

The latest rally pushed the company to a valuation of more than $104 billion and some analysts questioned the rationale.

"It has a fantastic brand, formidable manufacturing capabilities and (by all accounts) a fabulous product; but is it really worth more than Volkswagen," said Hargreaves Lansdown analyst Nicholas Hyett.

Tesla last week overtook the German company as the second most valuable carmaker behind Japan's Toyota Motor.

Key to Tesla's growth strategy is the company's $2 billion Shanghai factory, where it aims to produce 150,000 Model 3 sedans and later increase output to 250,000 a year, including the Model Y.

But as China tries to contain a rapidly spreading coronavirus, Tesla expects a delay of one and a half weeks in the ramp up of the Shanghai-built Model 3 due to a government-required factory shutdown.

The Model Y production in California and the Shanghai factory ramp-up are also expected to "temporarily weigh on margins."

Pressure on cash pile
Tesla on Wednesday said its cash balance increased to $6.3 billion and total operating expenses rose less than 1 percent to $1.03 billion in the three last three months of 2019.

At the same time, however, Tesla's debt remains steady, amounting to $13.42 billion as of the end of 2019.

The company has been trying to keep a tight lid on costs but its new initiatives, which also include the construction of its first European factory in Germany, an electric pickup truck, a new generation of the Tesla Roadster and automated driving features, are likely to put a strain on its cash pile.

Musk on Wednesday also said Tesla would focus on ramping up battery production capacities in 2020 to be able to produce more vehicles.

Net income attributable to common shareholders fell to $105 million, or 56 cents per share, for the three months ended December 31, from $140 million, or 78 cents per share, a year earlier.

Revenue rose to $7.38 billion from $7.23 billion a year earlier. Analysts had expected revenue of $7.02 billion.

© Thomson Reuters 2020