Is Tesla’s Window of Opportunity Closing?

Tesla has a profitability problem

Some Tesla bears argue that the company is a disaster waiting to happen, because it has been consistently unprofitable, while free cash flow has been deep in the red. However, Tesla’s losses and its cash burn can be explained by the big investments it is making to enable growth. For example, the company is rapidly expanding its production capacity while pouring huge amounts of money into R&D.

A silver Tesla Model 3

On the other hand, Tesla’s low gross margin is a valid concern. Excluding the benefit from selling zero-emission vehicle (ZEV) credits, Tesla’s gross margin fell to 13.8% last quarter from 22.2% a year earlier. (The company’s target is 25%.)

Some of this decline was caused by inefficiencies related to the Model 3 production ramp-up, but Tesla is also experiencing margin pressure on its fully mature Model S and Model X vehicles. Meanwhile, on Tesla’s recent earnings call, management stated that Model 3 gross margin probably won’t reach 25% until next year. This suggests that Tesla may need to reach its target of building 10,000 Model 3s per week to achieve a 25% gross margin. And even that may be a best-case scenario, considering the company’s history of overpromising.

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