Autos

Four Critical Points From Tesla's Profit Promise


A Tesla Model S is displayed after winning the 2013 World Green Car of the Year award at the New York Auto Show on March 28

Photograph by John Moore/Getty Images

A Tesla Model S is displayed after winning the 2013 World Green Car of the Year award at the New York Auto Show on March 28

Tesla Motors (TSLA), the carmaker promising to upend the industry with luxurious electric sedans, will finally drive into the black this quarter, according to an announcement late yesterday.

The unexpected news is revving Tesla shares this morning, and billionaire Chief Executive Officer Elon Musk has been promising in cryptic tweets that the company will announce even bigger news tomorrow.

Specifically, Tesla is finally cranking out cars. It said it will deliver 4,750 of its celebrated Model S sedans by the end of March, compared with earlier projections of 4,500.

Those sales will add up to “full profitability,” which would be a first for Tesla. Here are four reasons why the news is huge for Musk and shareholders who kept the faith:

Good publicity: A controversial review in the New York Times in early February may not have dinged the firm as badly as it seemed. Musk conceded on Bloomberg Television that the write-up (and the subsequent weeklong back-and-forth in the press) wiped out “a few hundred orders.” Unless that dip in demand is manifest in future quarters, it looks like Tesla has moved on.

Research restraint: If profit is indeed in the cards, investors should be as thrilled about cost control as they are about revenue. Specifically, Tesla’s research and development costs seem to finally be falling in line. Last year, for example, the share of total operating expenses going to R&D steadily fell, from 69 percent of costs in the first quarter to 60 percent in the final three months of the year. Tesla’s engineering wizards made a Motor Trend “Car of the Year.” Now the company needs to get some serious mileage out of that stunning and expensive feat before doubling down on future models.

Unapologetic elitism: Tesla may yet revolutionize driving, but it seems to have dialed back those expectations for the moment. It said it will spike its cheapest and least powerful Model S due to low demand, forgoing a $59,900 offering for models that cost at least $10,000 more. In other words, Musk and Co. realize that their wares are top-of-the-pyramid toys—at least for the time being.

Pricing power: Showing a profit gives the company much-needed momentum in its bid to upend auto retailing. Tesla is still fighting lawsuits from dealers’ groups in a number of states, because it is angling to cut out the middleman—showcasing the cars in its own showrooms and taking orders directly online. The cost of building and maintaining brick-and-mortar boutiques—not to mention the cost of defending its legal right to do so—likely would have been one of the first things under shareholder pressure if losses continued unchecked.

Kyle-stock-190
Stock is an associate editor for Businessweek.com. Twitter: @kylestock

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  • TSLA
    (Tesla Motors Inc)
    • $263.25 USD
    • 1.51
    • 0.57%
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