New York (CNN Business)It hasn’t received a lot of attention with all the Twitter wars and comments from CEO Elon Musk about Covid-19, but Tesla has become incredibly profitable.
It is a remarkable achievement for a company that reported its first annual operating profit only in January, and has never posted an annual profit using the strict accounting measures used to judge net income and losses.Tesla (TSLA) followed that successful 2019 result by surprising Wall Street with a first-quarter profit, despite the Covid-19 pandemic cutting into its sales and forcing plant closings in California and Shanghai. (They have since reopened.)
The key to that profitability has to do with product itself — electric vehicles are far less complex to make than those with internal combustion engines — and a labor force that Musk has aggressively tried to prevent from unionizing. In its January note to investors the electric automaker predicted “further cost efficiencies should allow Tesla to ultimately reach an industry-leading operating margin.” Unlike the past, when Tesla would fall short of Musk’s bold promises, it was the industry profit leader, at least in the first quarter. Read MoreTesla’s gross profit margin was 20%, compared with 17% at Toyota and Volkswagen, and less than 10% at General Motors, Ford and Fiat Chrysler. The company has maintained a profit margin of 18.8% or better for the last three quarters.Perhaps most importantly, there now are reasons to believe Tesla’s profit guidance. “EVs are not just profitable,” wrote Morgan Stanley auto analyst Adam Jonas in a recent note. “When they’re made at scale with the right cost structure they can be extremely profitable.”
Photos: Billionaire entrepreneur Elon Musk
Photos: Billionaire entrepreneur Elon MuskElon Musk, the CEO of SpaceX and Tesla Motors, poses for a photo in 2013.Hide Caption 1 of 35
Photos: Billionaire entrepreneur Elon MuskMusk, left, is seen with his brother, Kimbal, in this childhood photo posted by their mother, Maye. Elon Musk was born June 28, 1971, in Pretoria, South Africa. His mother is a model and nutritionist. His father, Errol, is an engineer.Hide Caption 2 of 35
Photos: Billionaire entrepreneur Elon MuskMusk is seen at left with his sister, Tosca, and Kimbal in 1976.Hide Caption 3 of 35
Photos: Billionaire entrepreneur Elon Musk”When Elon was young, I noticed that he read everything,” Maye Musk wrote in her book “A Woman Makes a Plan: Advice for a Lifetime of Adventure, Beauty and Success.” When Elon was 12, he wrote code for a video game called “Blastar” and sold it to a computer magazine for $500.Hide Caption 4 of 35
Photos: Billionaire entrepreneur Elon MuskMusk celebrates his 18th birthday in 1989. He would leave South Africa for Canada, where he studied at Queen’s University in Kingston, Ontario. In 1995, Musk graduated from the University of Pennsylvania with degrees in economics and physics.Hide Caption 5 of 35
Photos: Billionaire entrepreneur Elon MuskMaye Musk celebrates her 50th birthday party with her children in 1998. With her, from left, are Tosca, Kimbal and Elon. In 1995, Elon Musk co-founded Zip2 Corp., a company that developed online city guides. He would sell it to Compaq in 1999 for $307 million.Hide Caption 6 of 35
Photos: Billionaire entrepreneur Elon MuskPayPal CEO Peter Thiel, left, and Musk pose at the company’s corporate headquarters in Palo Alto, California, in 2000. Musk had co-founded X.com, an online banking and financial services company. It merged with Continuity in 2000 and was renamed PayPal. The online payment platform was acquired by eBay in a $1.5 billion deal in 2002. Musk pocketed $165 million.Hide Caption 7 of 35
Photos: Billionaire entrepreneur Elon MuskMusk poses next to a SpaceX Dragon spacecraft in 2008. Musk founded SpaceX in 2002 with the intention of making space travel cheaper and more accessible. In 2010, the Dragon became the first commercial spacecraft to orbit the Earth and return. In 2012, it became the first private capsule to connect to the International Space Station.Hide Caption 8 of 35
Photos: Billionaire entrepreneur Elon MuskMusk, bottom, watches a Falcon 1 rocket lift off in 2008. It was the first privately developed liquid-fuel rocket to reach orbit.Hide Caption 9 of 35
Photos: Billionaire entrepreneur Elon MuskIn 2008, Musk became CEO and product architect of Tesla Motors. Years earlier, he had joined the electric-car company as chairman of the board, overseeing its initial round of investment funding.Hide Caption 10 of 35
Photos: Billionaire entrepreneur Elon MuskMusk walks with US President Barack Obama at Florida’s Kennedy Space Center in 2010.Hide Caption 11 of 35
Photos: Billionaire entrepreneur Elon MuskMusk is joined by his fiancee, actress Talulah Riley, and his twin sons, Griffin and Xavier, at a Nasdaq opening-bell ceremony in 2010. Musk has been married three times — twice to Riley. Their second divorce came in 2016.Hide Caption 12 of 35
Photos: Billionaire entrepreneur Elon MuskMusk unveils the Falcon Heavy rocket, billed as the world’s most powerful rocket, in 2011. Musk told CNN he decided to build the rocket to put bigger satellites into orbit.Hide Caption 13 of 35
Photos: Billionaire entrepreneur Elon MuskMusk attends the opening of a Tesla store in Newport Beach, California.Hide Caption 14 of 35
Photos: Billionaire entrepreneur Elon MuskMusk walks in a procession after delivering the commencement speech at the California Institute of Technology in 2012.Hide Caption 15 of 35
Photos: Billionaire entrepreneur Elon MuskMusk holds up a model rocket in this photo for Bloomberg Businessweek magazine in 2012.Hide Caption 16 of 35
Photos: Billionaire entrepreneur Elon MuskMusk appears on the late-night talk show “Jimmy Kimmel Live” in 2013.Hide Caption 17 of 35
Photos: Billionaire entrepreneur Elon MuskMusk poses with a Tesla during a visit to Amsterdam, Netherlands, in 2014.Hide Caption 18 of 35
Photos: Billionaire entrepreneur Elon MuskMusk and his then-wife, Talulah Riley, attend the Vanity Fair Oscar Party in 2014.Hide Caption 19 of 35
Photos: Billionaire entrepreneur Elon MuskMusk represents SpaceX at a US Senate subcommittee hearing in 2014. The hearing was to learn more about space launch programs. SpaceX had already landed a few federal contracts at that point, and Musk made his case for more.Hide Caption 20 of 35
Photos: Billionaire entrepreneur Elon MuskMusk unveils the dual-engine chassis of the new Tesla Model D in 2014.Hide Caption 21 of 35
Photos: Billionaire entrepreneur Elon MuskMusk attends the Time 100 Gala with filmmaker George Lucas, left, and rapper Kanye West in 2015.Hide Caption 22 of 35
Photos: Billionaire entrepreneur Elon MuskMusk guest-stars on an episode of the TV sitcom “The Big Bang Theory” in 2015. He played himself.Hide Caption 23 of 35
Photos: Billionaire entrepreneur Elon MuskMusk has long said he wants to make humans an “interplanetary species,” and in 2016 he laid out his plan to colonize Mars. He was speaking at the International Astronautical Congress, a meeting of multiple international space-exploration associations.Hide Caption 24 of 35
Photos: Billionaire entrepreneur Elon MuskMusk and other business leaders listen to US President Donald Trump during a visit to the White House in 2017.Hide Caption 25 of 35
Photos: Billionaire entrepreneur Elon MuskMusk speaks to reporters in 2018, a day before SpaceX launched the Falcon Heavy, the world’s most powerful rocket.Hide Caption 26 of 35
Photos: Billionaire entrepreneur Elon MuskMusk and his girlfriend, singer Grimes, attend the Met Gala in New York in 2018.Hide Caption 27 of 35
Photos: Billionaire entrepreneur Elon MuskMusk is seen on a television monitor on the floor of the New York Stock Exchange in 2018. Musk smoked a joint while talking to podcast host Joe Rogan about what it’s like inside his head (“a never-ending explosion”), keeping a car company in business (“very difficult”) and trying to get governments to regulate artificial intelligence (“nobody listened”).Hide Caption 28 of 35
Photos: Billionaire entrepreneur Elon MuskIn 2018, Musk demonstrates his Boring Company’s first tunnel. It was built as an experiment in underground transportation, with the aim of providing alternative routes to traffic-jammed streets.Hide Caption 29 of 35
Photos: Billionaire entrepreneur Elon MuskMusk leaves a federal court in New York in 2019. The Securities and Exchange Commission had asked the court to hold Musk in contempt for violating an agreement that requires he get pre-approval for social-media posts about Tesla. The judge asked Musk and the SEC to go back to the drawing board and better define exactly how and when Musk’s tweets need to be reviewed. The two parties were able to reach a settlement.Hide Caption 30 of 35
Photos: Billionaire entrepreneur Elon MuskMusk reveals Tesla’s new electric pickup truck in 2019. A demonstration of the Cybertruck’s supposedly unbreakable windows backfired, however, when a metal ball thrown at the windows did, in fact, break them.Hide Caption 31 of 35
Photos: Billionaire entrepreneur Elon MuskMusk leaves a federal court in Los Angeles in 2019. After a four-day trial, a jury took less than an hour to decide that Musk did not defame a British caver when he sent a tweet calling him a “pedo guy.” Defense lawyer Alex Spiro said Musk’s tweet “was a joking, deleted, apologized for, responsive tweet.”Hide Caption 32 of 35
Photos: Billionaire entrepreneur Elon MuskMusk attends a Tesla ceremony in Shanghai, China, in January 2020. Tesla started delivering its Shanghai-made Model 3 cars to the public, the first step in Musk’s much bolder plan for the world’s biggest market.Hide Caption 33 of 35
Photos: Billionaire entrepreneur Elon MuskMusk speaks at a January 2020 news conference after SpaceX’s new crew-worthy spacecraft, Crew Dragon, reached its last major milestone in a years-long testing program. NASA asked the private sector to develop crew-worthy spacecraft to replace the space shuttle program after it was retired in 2011. SpaceX was allotted $2.6 billion and Boeing was awarded $4.2 billion in 2014, and the space agency initially predicted their vehicles would be ready to fly astronauts by 2017. But development of both spacecrafts took years longer than expected.Hide Caption 34 of 35
Photos: Billionaire entrepreneur Elon MuskMusk looks at his new baby boy in this tweet posted by his mother in May 2020. The baby, named X Æ A-12, is his first child with Grimes. He has five other children from a previous marriage.Hide Caption 35 of 35
Making electric automobiles rather than cars with the more complex internal combustion engines, with nonunion labor to boot, is a pretty good competitive edge. And electric cars have far fewer moving parts than cars with traditional internal combustion engines.Auto industry experts say building an electric car requires nearly one-third fewer worker hours than building a traditional gas-powered car.It’s a major part of the reason that traditional automakers are spending billions to develop their own electric vehicles. And it’s why the United Auto Workers union is so concerned about the future of their members’ jobs as automakers plan to shift to electric vehicles at GM (GM), Ford (F) and Fiat Chrysler (FCAU).And it might be the reason that despite Tesla’s still modest output of vehicles — only 367,500 cars sold last year, less than 5% of GM’s total — its stock is the industry’s second most valuable behind only Toyota (TM). Tesla’s market value is more than that of Volkswagen (VLKAF), GM, Ford and Fiat Chrysler — combined. Shares have risen 87% so far this year, despite the effects of the Covid-19 pandemic on production and sales, and despite falling from record highs for the stock in early February before the overall markets turned bearish.”Proving that EVs are more profitable than [internal combustion engines] helps surmount a major impediment to investment in the tech and broader adoption… as well as recognition by investors that moving to EVs doesn’t have to come at the sacrifice of profitability,” Jonas said in his note.
Why it lost money in the past
Tesla’s past inability to turn a profit stemmed from its focus on building niche luxury vehicles, such as the Model S and Model X, in relatively limited numbers. It spent big money trying to get its first vehicle aimed at a more mass market, the Model 3, into production in the numbers it had promised.It has finally done so. And its Model Y, which just started production, was profitable in its first quarter of production this year, a first for the company. Tesla is forecasting the Model Y will have a higher profit margin than the Model 3. As car buyers shift their purchases to SUVs from sedans, the Model Y is expected become by far the company’s best-selling car. If its sales forecasts prove accurate, it would be the best-selling SUV of any kind in the United States — gas or electric — passing established models like the Toyota Rav 4.
Challenges in the near term
Tesla will have a challenge in reporting a second-quarter profit. Halfway through the quarter, the company is only now restarting production at its main plant in Fremont, California, as well as its Nevada battery factory which were shut by Covid-19 health concerns. And it’s not clear how much safety measures being put in place – such as limits on the worker interactions, barriers between workers and limits on the number of people in different areas of the plant at one time – will affect productivity at the plants.Then there’s the question of sales demand. Record job losses and millions working from home have eliminated the need for work commutes, a major factor behind car sales. And the huge drop in gasoline prices doesn’t provide an economic argument for buying an electric car.Even so, Tesla said it ended the first quarter with the biggest-ever backlog in orders for its cars. It also had nearly 20,000 completed cars on hand at the end of the first quarter that it was unable to deliver amid the shutdown. Those sales could show up in the second quarter with virtually no additional cost to Tesla.Tesla has ambitious growth plans, including a plant already under construction in Germany, and it is expected to announce a new US plant by the end of July.
Musk doesn’t plan to stop there. Within five years, he said, there will be “several” more plants beyond the two it operates today, potentially expanding Tesla’s profit margins even further. Investors are starting to realize that, too.
Source: edition.cnn.com
