Tesla’s Model 3 Surge Marks a Big Step Toward Musk’s Profit Goal

(Bloomberg) -- Elon Musk isn’t saying so yet, but Tesla Inc. may have just has taken a major step toward his most elusive goal: earning profits.

Just days after federal authorities castigated Musk for his tweets about taking Tesla private, the company announced that it had hit its production target for its crucial Model 3 sedan, making more than 53,000 last quarter.

The news was greeted cautiously on Wall Street, perhaps given Musk’s record of late. But the overarching message from Tesla’s results is that it may finally be starting to live up to the chief executive officer’s lofty ambition to do something unprecedented: make money manufacturing and delivering electric cars at scale.

Tesla’s challenges -- including logistics snafus, China tariffs and an impending onslaught of new electric vehicles from competitors -- remain formidable. But for one day, at least, the attention was on Tesla and its progress rather than its larger-than-life CEO.

“We think deliveries are good enough to support strong financial results,” Ben Kallo, an analyst at Robert W. Baird & Co., wrote Tuesday, adding that Tesla may earn the net income and positive cash flow it forecast for the quarter. He has the equivalent of a buy rating on the shares.

Tesla shares fell 1.6 percent to $305.81 as of 1 p.m. in New York, giving back some of Monday’s 17 percent gain.

SEC Settlement

The stock surged a day earlier on Musk’s settlement of a Securities and Exchange Commission lawsuit. After initially seeking to bar him from serving as an officer or director of the company over his Aug. 7 take-private tweets, the regulator allowed him to remain CEO and stay on Tesla’s board. Musk, 47, agreed to pay $20 million and step down as chairman.

Tesla handed over 83,500 vehicles in the third quarter, double its deliveries in the prior three months. Of those vehicles, 55,840 were Model 3s, consistent with what the company had projected as it finally started to mass-manufacture the sedan.

While Tesla doesn’t break out deliveries by country, the results suggest it’s climbing the ranks of the U.S. passenger-car market. Industrywide sales reported Tuesday slumped for most automakers, which have been dogged by flagging demand for sedans.

Tesla’s Model 3 Surge Marks a Big Step Toward Musk’s Profit Goal

Tesla produced 53,239 Model 3s in the quarter, in line with the 50,000 to 55,000 range that the company had forecast.

Bloomberg’s experimental tracker built to estimate output of the car overestimated production by just 0.4 percent, or fewer than 220 cars.

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Tesla’s Model 3 Surge Marks a Big Step Toward Musk’s Profit Goal

While Musk has predicted Tesla will report a profit and positive cash flow for the quarter, the company was cagey in its statement Tuesday, saying it’ll share information about financial performance in its third-quarter earnings report. When Tesla released production and deliveries results three months ago, it reaffirmed guidance for positive net income and cash flow in the third and fourth quarters.

China Challenges

Tesla also pointed to headwinds that may have contributed to the reluctance to address profitability. Trade tensions between the U.S. and China have boosted tariffs on the company’s vehicles to 40 percent, compared with 15 percent for other imported autos.

To get around those duties, Tesla said it’s accelerating construction of a factory in Shanghai. The company sealed an agreement with the city’s government in July to start building its second car assembly plant in the world and said at the time that the first vehicles will roll off the line within roughly two years. It’ll take another two to three years for the factory to reach its capacity to build about 500,000 vehicles annually.

Another piece of information missing from the release was Tesla’s backlog of orders for the Model 3. While the company said it had about 420,000 net reservations three months ago, it didn’t give an updated figure in Tuesday’s statement.

Door-Side Deliveries

Tesla and its supporters went to great lengths to boost deliveries as the quarter came to a close. Owners volunteered in droves at stores and service centers to help answer questions for customers, many of whom are new to electric cars. The company also offered incentives including free charging and referral-program perks to entice purchases.

Musk has been candid on Twitter about Tesla still having kinks to work out in smoothly getting cars into the hands of customers. He’s responded to several frustrated buyers to apologize for delays and said the company has left what he called “production hell,” only to end up in “delivery logistics hell.”

Still, Musk has said problems such as a shortage of vehicle carriers will be easier to solve than the manufacturing woes that plagued the company after Model 3 output began last year. One strategy it’s employing is to deliver more cars directly to customers at their home or office, a service that it started offering during the third quarter.

©2018 Bloomberg L.P.