Tesla's latest earnings beat disguises a bigger, long term problem facing Elon Musk's automaker

  • Tesla reported a Q1 profit, but its revenue has been flat.
  • Tesla should be growing the topline at this point in its history.
  • Uneven pricing of its vehicles is making revenue growth harder to predict, and that’s a problem.
  • See more stories on Insider’s business page.

Tesla reported first-quarter earnings last week, beating Wall Street expectations on both the top and bottom lines. But once again, its revenue was enhanced by more than half a billion dollars in emission credit sales and the unexpected unloading of about $275 million in Bitcoin from the $1.5 billion stake the company established earlier this year.

Elon Musk’s carmaker is in no immediate financial danger: It has $17 billion in cash on the balance sheet. It retains a near-monopoly in all-electric premium vehicles, even given new entries from Ford, General Motors, Porsche, Audi, Mercedes, and others.

And it’s silly to worry about Tesla’s profitability. Take away the credit sales and the firm swings back to a loss, sure. But for now, the mission is about growing sales into future demand, which with a massive stimulus on tap from the Biden administration, could be poised to surge.

The company’s revenue, though, looks like a potential problem. 

Auto companies should generate a steady topline

Carmakers should, if they’re executing properly, have quite reliable revenue. GM, to use just one example, has been posting between $35-40 billion in quarterly revenue since the end of 2010.

Tesla shouldn’t be expected to reach that kind of consistency yet because it’s still expanding output. Making more cars means selling more cars. And for a while, it was growing its topline pretty steadily. But lately, revenue has been a sort of flattish-to-wiggly line, which doesn’t make sense if you’re packing on hundreds of thousands in new annual sales.

On the bottom line, there’s all manner of levers that a carmaker can pull to post a profit. But the topline, in the auto industry, tells no lies. And for Tesla, the lately disappointing revenue growth can’t be entirely chalked up to COVID-19 — mainly because Tesla sales didn’t really tank during the pandemic.

Rather, Tesla’s topline issues can be blamed on its idiosyncratic approach to pricing.

Let’s take a step back. Almost all other big automakers sell their vehicles into a wholesale channel. They have franchised dealers who are the first customers. The “manufacturer’s suggested retail price” is basically just an abstract starting point for the customer and dealer.

This lets major car companies book revenue when vehicles roll off the assembly lines (they also loan money to the dealers to build vehicle inventories). Automakers then extend financing through the dealership to consumers. Of late, a combination of easy credit and demand for large SUVs and pickups has driven transaction prices in the US to historically high levels.

Tesla operates as its own dealer and causes revenue to buck around with frequent price hikes and cuts to either juice demand or bring in more cash. So, it’s more directly exposed to price fluctuations affecting its topline. (You could argue that this increases Tesla’s financial transparency, which it does.)

Over time, a higher volume of sales should smooth everything out, and Tesla should establish a typical car business consistency on the topline. But for now, with effectively just two new-ish vehicles for sale — the Model 3 sedan and the Model Y SUV — it’s difficult for Tesla to get there. 

The hidden curse of the no-deal, direct-sales model

Until it masters this challenge, ramping up production is simply going to exacerbate the price problem while intensifying Tesla’s operational costs. That could create a double whammy: spending more cash to manufacture more cars that the company can’t charge as much as it wants for, without stranding a lot of vehicles in inventory. 

(Vehicles in inventory are a huge troublemaker for Tesla with its no-dealership model because while a traditional carmaker can unload cars and trucks on a dealer and then pipe in incentives to make up for it, Tesla has to directly grapple with every unsold vehicle.)

Nobody thinks about this aspect of Tesla’s business because, for the most part, people hate car dealers and are cheerleading Tesla’s direct sales model. But dealerships offer numerous advantages to carmakers, just as the oil industry does by maintaining an efficient national refueling network for internal combustion vehicles. 

The solution for Tesla is to sell more types of vehicles while also expanding overall sales. That way, it won’t be stuck with one or two models with unpredictable pricing, but rather a dozen vehicles, with perhaps three or four bringing in nice, consistent revenue that only goes up as demand increases and credit flows more freely. 

Now for the big “but.” It’s going to be very, very expensive for Tesla to do that. The company has to build new factories, design and engineer new vehicles, and then efficiently manufacture those vehicles and effectively service them once they end up in consumers’ driveways and garages. 

To put this in aerodynamic terms, Tesla currently doesn’t have much drag to contend with. But as it gets larger, the drag should increase.

Luckily, that won’t undermine revenue. Instead, revenue should jump higher. And at that point, we should finally learn whether Tesla can be truly profitable, and at what level. 

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