Many Tesla Inc. (TSLA) investors for years have forecasted that the electric car maker led by CEO Elon Musk would finally enter a path of sustained profitability. Their latest hopes were pinned on estimates of narrowing losses in the latest 2Q results after a year of management and production crises at the company.

Instead, Tesla reported a loss of $1.12 per share, far bigger than any analyst had expected, Bloomberg reports. If that were not enough, CEO Musk announced during his earnings call that J.B. Straubel, Tesla's chief technical officer (CTO), is leaving that position to become an "adviser" to the company. Straubel is a co-founder of Tesla, and he has been with the company longer than Musk. It was one of many high-profile departures at Tesla in the past year, badly thinning its management ranks.

It appeared to be little solace to investors that the company delivered a record 95,200 vehicles in the quarter, per FactSet Research Systems. Investors showed their displeasure by punishing Tesla shares, down as much as 14.8% in late morning trading Thursday, a loss of billions of dollars in market value. At that point, the share price was 41.8% below its 52-week high.

Key Takeaways

  • The 2Q 2019 loss at Tesla is much larger than expected.
  • Co-founder and Chief Technology Officer J.B. Straubel steps down.
  • CEO Elon Musk puts profitability on the back burner.
  • Musk now says that expansion is the top goal.

Significance For Investors

Earlier in 2019, Musk stated that he expected Tesla to be "profitable for all quarters going forward," as quoted by The Wall Street Journal. In the wake of the 2Q loss, he now says, "continuous volume growth, capacity expansion and cash generation will remain the main focus," per a letter to shareholders cited by the Journal. Tesla will be "most focused on expanding our manufacturing footprint in new regions, launching new products and continuing to improve the customer experience while generating and using cash sustainably," Musk added.

In a research note analyzing Tesla's earnings report, Bank of America Merrill Lynch observed that the consensus was calling for a loss of 31 cents per share, while their own analyst was expecting a 50 cent loss. BofAML also notes that the gross margin for Tesla's automotive division was 18.9%, below the consensus estimate of 20.9% and BofAML's estimate of 20.2%.

Although Tesla reported free cash flow of $614 million for the quarter, BofAML observes that it otherwise would have been negative, if not for an inventory drawdown of about $500 million and a capital expenditue reduction of about $300 million. While Tesla believes that its business is now at a point where it is "self-funding," BofAML is "skeptical" that this can occur "without pushing/pulling working capital timing and/or thrifting capex and investment spend (an imprudent strategy for a growing company.)"

J.B. Straubel has been the CTO at Tesla since 2005, with his recent duties including overseeing the company's energy business, its Supercharger network, and its battery plant in Nevada. He claims that he is not "disappearing" from the company, and that he is "not going anywhere," as quoted by Bloomberg. His replacement as CTO is Drew Baglino, the vice president of technology.

In a note to clients quoted by Bloomberg, Alex Potter, an analyst with Piper Jaffray, views this change with concern. Calling Straubel "probably the second-most important person at Tesla," Potter added, "Even though he is retaining 'adviser' status, his departure is nonetheless likely to rattle investors."

Musk's surprise announcement regarding Straubel was in character with his shoot-from-the-hip style that defies normal corporate conventions. In January, he also made the first public mention about a departing executive during an earnings call. That time, the executive was chief financial officer (CFO) Deepak Ahuja.

Looking Ahead

BofAML reflects its skepticism about Tesla in its price target of $225; Tesla fell close to that point on the morning of July 25. But analysts say Tesla faces even bigger issues, including: whether it's best for Musk to depart as CEO, whether it is time for an automotive industry veteran to take the helm, or whether Tesla may need to be bought out by an established automaker.