Tesla’s Challenges And Pressure On Profits Could Drag On In The Near Future

There has been a significant drop in the shares of United States electric car maker Tesla following its reporting of a second quarter loss despite touching a record number of deliveries in the period along with higher than usual levels of revenues and production.

The graph for Tesla’s stock price has been like a roller coaster with a sharp fall followed by a large spike. However it appears that investors would be more cautious this time around about the fortunes of the company despite Tesla CEO Elon Musk presenting a bright forecast for the company for the second half of the year.

Trying to show the second quarter loss of $408 million in positive light at a conference call with reporters and analysts, Musk said that, “we expect to be breakeven this (third) quarter and profitable next quarter.” He also promised that Tesla will “be cash flow positive going forward, with the exception of quarters when we introduce a new product.”

Tesla has a number of new products in its pipeline which include a battery-powered semi-truck, an all-electric pickup, a second-generation Roadster and the Model Y sport utility vehicle. But what analysts and investors are worried about is whether those new models would be able to deliver not only increased revenues but also higher profit margins that the markets are expecting.

The performance of the company in the second quarter was not all bad. Tesla managed to churn out a record number of electric vehicles at 87,048 while creating an all time record of deliveries of 95,356 vehicles in the same period. And yet the company posted a loss.

“Tesla hitting a sales record is not a surprise considering shoppers were scrambling to take advantage of the waning tax credit,” said Jessica Caldwell, the chief analyst with auto tracking service Edmunds.

“Also, Tesla may have a reputation as an innovator but to boost sales they stole a page from the traditional automaker playbook by lowering prices and making buying easier with a leasing program,” Caldwell said. Both of these moves were instrumental in preventing the company from reporting a jump in its profit margins.

Moreover, serious competition is finally being faced by Tesla. The characteristics that Tesla’s Model 3 offer customers is being almost matched by the likes of the new Audi e-tron and the latest and longest-range version of the Nissan Leaf in addition to the little Chevrolet Bolt EV and Jaguar I-Pace. And over the next 12 to 24 months, there would be a wide range of companies entering the marketing with electric cars which include the likes of Porsche, Volvo, Mercedes-Benz and Volkswagen.

But according to analysts, the biggest challenge for Tesla would come after it completes construction of its new assembly plant in Shanghai aimed at the Chinese market – the largest market for electric cars in the world. Till date, Tesla has not been able to make any serious dent in that market. Tesla would however be able to avert the tariffs by China on US products because of the trade war between the US and China after completion of its Shanghai plant.

“We do not believe the next two quarters revenue will grow either from second-quarter levels or on a year-on-year basis,” RBC analyst Joseph Spak wrote investors after the earnings announcement. “In fact, we don’t see revenue returning to near second-quarter levels until the third quarter of 2020. So growth is likely to be on hiatus and we don’t believe the valuation reflects this.”

(Adapted from CNBC.com)

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