Introducing its Model 3 to the world on March 2016, Tesla Motors Inc. (TSLA) announced that it received deposits for 373,000 vehicles in just a couple of months. Tesla lost $283 million in the first quarter of 2016 on sales of 14,810 vehicles. 

Losses since then have continued to mount as doubts surround CEO Elon Musk's claims that the electric vehicle (EV) manufacturer can turn a profit.

Promises to deliver enough vehicles to meet demand has fallen short for years. Furthermore, reliability and safety issues plague the EV manufacturer. Last year the company was plagued with delivery and quality control issues. 

Key Takeaways

  • Tesla is still losing money selling cars despite having the best selling EV of 2018—its Model 3.
  • The company lost $408 million in the second quarter of 2019. 
  • Tesla hopes to make the Model 3 more affordable, with the goal of $35,000.
  • The idea is that Tesla will eventually sell enough of its lower margin Model 3 cars to offset a steady decline in the company’s Model X and S. 

Tesla's Prospects Looking Up?

The second quarter of 2019 was a banner year for Tesla, as it was its best quarter ever in terms of cars delivered. In fact, the Model 3 was the best-selling EV of 2018 across the globe. There were 250,000 Model 3s sold last year. 

Yet, Tesla reported a $408 million loss during the second quarter of this year—not all directly related to Model 3 sales, but still. Tesla’s Model S and Model X car sales have slowed to a crawl, which is a higher margin than Model 3s. 

Tesla has a plan, however. The company laid off 7% of its workforce and even considered closing its stores. The idea is to make the Model 3 more affordable—$35,000 here we come.

GAAP vs. Non-GAAP Metrics

Musk’s financial creativity extends to financial reporting, as Tesla prefers to focus on non-GAAP methods rather than GAAP standards. In a February 2016 communication to shareholders, the company focused on a novel financial measure known as core operational cash flow, a pro forma methodology that adds cash from leasing company sales to cash from operations.

The result was a positive $179 million, as opposed to GAAP measures of free cash flow at negative $441 million for the fourth quarter of 2015. The Securities and Exchange Commission (SEC) requires that companies focusing on non-GAAP metrics provide comparisons to GAAP methods, but Tesla omitted this step in its fourth-quarter letter.

The company was profitable for the first time in two years during its second quarter of 2018. The company continues to raise capital to fund the production and capital expenditures (CAPEX). This has left a large debt overhang. The finished the second quarter of 2019 with its most cash on hand—$5 billion. During the second quarter, the company raised $2.35 billion, selling $750 million in stock and $1.6 billion in debt. 

Model S, X

Now, as of Oct. 2019, Model 3 is the top-selling car for the automaker. Model 3 is Tesla’s more affordable model, helping attract the middle and upper-middle class into the high-end electric vehicle space. However, it’s also the company’s lowest margin car. 

Tesla’s higher-margin cars—the Model S and X, however, aren’t selling all that well.  Tesla exhausted more than $400 million in cash per quarter through 2015 before a single unit of the Model X was delivered. Sales fell over 20% year-over-year for the Model S and X in the second quarter of 2019.

The hope is that Tesla can sell enough lower margin Model 3s to make up for the decline in Model S and Model X cars.  

Model 3 Concerns and Competition

Tesla vehicle owners previously relayed a plethora of issues involving design and build quality for the Model 3. This includes malfunctions with the drivetrain and charging equipment. Tesla owners noted that response and repair time exceeded expectations, but, as the vehicle's age, mechanical failures outside of the warranty period project significant expense for consumers. However, quality is improving. 

In an Aug. 2018 note, UBS said that the Model 3 would remain unprofitable, even with the Long Range battery pack. UBS says it’ll be losing $5,900 per car. That’s at the base model price of $35,000. 

The other issue for the Model 3 is that it no longer is eligible for a $7,500 federal tax credit for electric vehicles. The credit ended on Jan. 1, 2019. There is a $1,875 credit that buyers do get, yet that ends in 2020. 

With delays and quality issues, many EV buyers may opt for the Chevy Bolt or other competitors rather than wait months or years to take delivery of Tesla's lower-priced offering. Granted its Smart Summon feature is unique, allowing car owners to summon their car from across the parking it, even that has been problematic.