Tesla broke a streak of disappointing results for both its automobile and solar businesses last quarter, according to the company's latest earnings report.
Coming into the back half of 2019, Tesla needed to prove it could ramp vehicle deliveries after a slow start to the year. To meet the company’s annual delivery target it would have to reach or exceed 100,000 deliveries in each subsequent quarter.
Meanwhile, the company's solar business, once the mightiest in the U.S. rooftop market, had been plummeting for a year with no signs of stopping. While this division represents a mere side project for Tesla currently, its fortunes matter considerably for the solar industry, and for CEO Elon Musk's vision for Tesla as a clean energy powerhouse.
But, as it has done in the past when pushed to the edge, Tesla performed under pressure.
The pathbreaking electric car company did something in the third quarter it hadn’t been able to do yet so far this year: make money. It reported $143 million in GAAP net income for a quarter where it had expected to break even.
Tesla also completed construction of its Shanghai Gigafactory ahead of schedule and initiated trial production there. “As far as I know, this is unprecedented,” Musk said of the factory's 10-month construction timeline on an earnings call Wednesday.
Plus, Tesla delivered a record 97,000 vehicles for Q3, though even that pace isn’t fast enough for the annual target of 360,000 to 400,000 deliveries, setting up a hustle in the fourth quarter to meet expectations.
The firm's solar business proved last quarter that it is not a completely lost cause, but also has ground to gain. In Q2, it hit a nadir of 29 megawatts installed, slightly more than one-tenth of its peak of 272 megawatts in Q4 2015. Instead of dropping further, it bounced back to 43 megawatts in Q3. That still puts the former market leader in third place, behind Sunrun and Vivint.
Tesla now represents 4 to 6 percent of the U.S. residential solar market, given the pace of quarterly installations for the past year, according to data from Wood Mackenzie Power & Renewables.
Energy storage has always been more of a core interest for Tesla, emerging from the engineering and production of electric cars. The news from that corner stayed strong: a record 477 megawatt-hours deployed for the quarter. That means Tesla single-handedly shipped more than 1 gigawatt-hour of storage capacity this year — 1,121 megawatt-hours, to be exact. And the year isn’t over yet.
Progress on cars, but tough quarter ahead
Tesla capped off 2018 with its largest quarterly delivery to date, sending out 90,700 cars. It entered 2019 expecting positive GAAP net income and free cash flow in every quarter of the year.
That vision collapsed in the first quarter, when car deliveries dropped 31 percent and the company suffered a GAAP net loss of $702 million. Still, Tesla insisted it would hit an annual target of 360,000 to 400,000 vehicles delivered, which required it to meet or exceed 100,000 deliveries in each subsequent quarter.
The plan going forward was to “significantly reduce” losses in Q2 and make a profit in Q3. After the company lost $408 million in the second quarter, the plan was to break even in Q3 and make a profit in Q4.
Tesla improved on that timeline as it reached a slim profit in Q3, amounting to GAAP earnings per share of $0.80. The company lowered operating expenses 15 percent compared to the previous quarter, achieving an operating margin of 4.1 percent. Automotive gross margins rose to 22.8 percent from 18.9 percent in Q2.
Positive free cash flow of $371 million helped the company compile $5.3 billion of cash and cash equivalents.
The financials appear to be moving in the right direction, but the looming target remains. The company has delivered 255,561 vehicles for the year, counting Model 3, Model S and Model X deliveries. That means it must crank out 104,439 next quarter to hit the low end of its previously stated target. It has never produced or delivered on that pace before.
The Shanghai factory could be the key to fulfilling expectations. The earnings report noted Shanghai has an annual capacity of 150,000 Model 3s, compared to 350,000 at Fremont. It's still in pre-production, but if it checks the final regulatory boxes with the Chinese government, it could boost production and delivery in the final quarter.
Looking ahead, Tesla moved the production launch of the Model Y crossover from fall of 2020 to summer 2020.
Prior to the earnings report, Tesla shares were trading at around $255, down from $310 at the start of the year. The S&P 500 Index was up nearly 20 percent over that time.
With the news of its latest earnings, Tesla shares jumped 17 percent in early trading on Thursday to around $300, clawing back much of their losses earlier this year.
Solar slump ends, but long-term prospects unclear
Former market leader SolarCity has not fared well since Elon Musk acquired it for $2.6 billion in 2016. The business has scaled back from market leadership and undergone a head-spinning number of strategic shifts as deployment numbers dropped.
But that slide stopped in Q3, at least temporarily. This recovery followed a shift to push solar sales online and guide customers to pre-packaged rather than customized options. As Musk phrased it on the call, “Would you rather pay for power or for marketing?”
Tesla previously cut sales channels like retail store partnerships and commission structures for salespeople, which remain popular with installers like Vivint and Sunrun.
"Tesla's strategy is intentionally not to put a lot of effort or investment into selling solar," said WoodMac solar analyst Michelle Davis. "They argue that their volumes will increase because they have such competitive pricing — due to super low customer acquisition costs — but selling solar online is not a proven sales channel."
If previously there was no evidence that a passive sales strategy works for as big an investment as rooftop solar, Q3 provided some evidence. But the long term prospects remain unproven.
"Even if this does work for Tesla, it might not be profitable in the long-term," Davis noted. "Tesla's pricing is suspiciously low compared to other installers and developers, and many other industry players question whether the company is making any money on these installations."
Solar roof rebound?
"Suspiciously low" also describes sales of Tesla's hotly anticipated solar roof. Musk originally used this product, which works like rooftop solar panels but costs more and is harder to install, to pitch shareholders on the benefits of acquiring SolarCity. Three years later, it still hasn’t reached anything resembling meaningful scale.
But now, Musk said on the call, the product is “finally ready for the big time.” So much so that he has scheduled another launch for it tomorrow. This will be the third version of the product, not that the first two versions amounted to much.
Musk acknowledged that Tesla's energy business had taken a back seat during the charge to scale up Model 3 production. To achieve that existential mission, Tesla reallocated engineering talent and battery production lines away from its energy business. But the company has restored resources to solar and storage, Musk said, and they are primed for "really crazy growth."
The Powerwall and Powerpack products have consistently proven their growth potential. Now the question is whether Tesla solar can keep up.
Updated with information from Tesla's earnings call.