Nearly three years after Elon Musk promised a $35,000 Model 3 electric car, Tesla Inc. has finally delivered. Now, the question is about the promise of profitability Musk has been making for the past few months.
Musk walked back his goal of being thinly profitable in the first quarter and in the black in every quarter thereafter in a conference call Thursday, saying Tesla will not be profitable this quarter and that it is only “likely” that it will be in the black in the second quarter. Tesla
shares, which were halted ahead of the official announcement, fell more than 3% in after-hours trading Thursday.
As Tesla has delayed selling the Model 3 at the price Musk promised at a gala event in April 2016, analysts have grown concerned about a financial quandary: The electric-car company may not be able to turn a profit at the lower price, but it could lose many prospective customers who only wanted the $35,000 version. Musk’s answer to that problem is cutting employees, just as Tesla already did earlier this year and midway through last year while trying to form a consistently profitable company.
Tesla announced Thursday that it would move to an online-only sales model, turning any retail stores that executives decide to keep into “galleries” and “showrooms” while laying off retail employees. In a blog post and conference call with the media Thursday afternoon, Tesla directly linked that move to an ability to reduce the prices on its cars by an average of 6%.
“I wish there was some other way, but unfortunately it will entail some reduction in force on the retail side,” Musk said in the call, in which he also suggested that sales in states that had blocked Tesla’s direct-sales model could get a boost from moving to an online-only model.
While a straight cut of retail employees could help balance the reduced price tag, Musk also said Thursday that Tesla will “be significantly increasing headcount in service technicians” to service all the cars it is selling, which could easily negate those cost savings. There could be unintended consequences as well, as Tesla salespeople may be talking potential customers into sales that will disappear once their number is greatly reduced.
These are just some of the many questions left after Thursday’s event, which Musk had teased on Twitter with scant details amid yet another dustup with the Securities and Exchange Commission. Musk largely avoided financial questions in particular, telling a reporter who asked directly what the margin would be on the $35,000 Model 3, “We’re not gonna answer questions like that.”
Musk was more receptive to questions about demand for the Model 3. He guessed that demand could exist for 500,000 cars a year, and admitted that Tesla does not know how many of those still holding onto reservations that cost $1,000 will now buy a Model 3 at the price Tesla promised them years ago.
“We first need to assess how many of the longtime reservation holders want the $35,000 car,” Musk said, before promising that customers who order the car now without a reservation would get it before tax credits diminish more at the end of June.
More on tax credits: Here’s some good news that will make Tesla owners smile (if not investors)
Jessica Caldwell, executive director of industry analysis at Edmunds, was not optimistic about demand Thursday.
“The options are so limited at the base level that shoppers might feel like they’re missing out on most of the elements that make a Tesla so appealing compared to other vehicles,” Edmunds said in an emailed statement Thursday afternoon. “If this model had come out when the Model 3 first launched and passion for Tesla was at its peak, shoppers might have given more latitude. But the expectations have been set and it’s likely going to be a tough sell moving forward.”
Very little will answer the obvious questions about profitability and demand except for time, which means the hot spotlight burning on the past few Tesla earnings reports will not go anywhere. Wedbush analyst Dan Ives said in a note that “the stock will be a ’prove me’ name for the next six to nine months,” and investors and analysts will certainly be looking for proof of profit when reports come out the rest of this year.
Even if laying off car-sales workers does lead to a bit more cash, Musk could easily decide to spend more than those savings on mechanics, or the coming Model Y, or the three “Gigafactories,” or resuscitating the rotting remains of SolarCity, or the many other Tesla initiatives in the works. As has been the case with Tesla since the beginning, the finish line feels just a little farther away with each lap around Elon Musk’s unpredictable track.
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