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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Tesla Q3 Reports Modest Gain On Credits, Faces Tough Road Ahead

Tesla assembly line

Contrary to consensus analyst expectations, Tesla has turned in its second-ever quarterly profit, for July to September, boasting that Q4 would also be in the black—but some analysts remain skeptical of Tesla’s cash-chomping ways, and argue that Tesla’s profit was thanks to credits, rather than true profit.

For the three months to September, Tesla booked a net profit of US$21.9 million under GAAP, on revenues of US$2.3 billion. The surprise news pushed up the company’s stock by as much as 5 percent.

Production-wise, Tesla reported a 92-percent annual increase in the number of cars it manufactured over the three months, to 25,185. Sales stood at 24,821.

Elon Musk and company are probably still celebrating, but skeptics are wary. For starters, Bloomberg notes that Tesla has changed the way it calculates its non-GAAP results, dropping most adjustments. In fact, Tesla said a few weeks ago that it would exclude from its non-GAAP third-quarter report only stock-based compensation to make it easier to reconcile GAAP and non-GAAP earnings. The non-GAAP net figure for July-September was US$111 million.

More importantly, Musk admitted in the conference call for the results announcement that Tesla had zero-emission vehicle credits to thank for its profit. He said “For those yelling about the ZEV credits being responsible for these profits, that is somewhat true. Tesla recognized $138.5M in ZEV credits in the quarter, and would not have been profitable on GAAP or non-GAAP without them.”

At the same time, Musk said that ZEV credits would play a negligible part in Tesla’s total income.

Despite the upbeat tone of the earnings announcement, it will take a lot longer than one quarter to convince some analysts that profits can be sustained, especially given their source this quarter. As one analyst told Reuters, sales of ZEV credits are “a near 100-percent profit business,” since they can be sold to other carmakers instead of forcing these carmakers to develop zero-emission vehicles of their own.

Related: Is ISIS Giving Up On Oil?

Tesla’s game-changer should be the affordable Model 3, which has a starting price tag of US$35,000. Earlier in October, Musk had said that Tesla would have to tap capital markets to raise funding for the final push with the Model 3, but has since changed tactics. Instead, Tesla will use up more than half of its total capex for the year—US$1 billion from the US$1.8 billion total—in the fourth quarter, suggesting there will be a special focus on the Model 3, which should bring free-emission vehicles to the regular household.

This ambition may be a bit lofty, considering a new study from the Energy Policy Institute at the University of Chicago and the Associated Press, which revealed that close to half of Americans (43 percent) are unwilling to spend even a dollar a month to combat climate change. Certainly, this leaves a majority of 57 percent who are willing to spend more than that—between US$20 and US$50 a month. Unfortunately, willingness in a survey is often different from real action, or, as Engadget writes, “plenty of respondents may have said they're willing to pay more than they actually would if the time came to open their wallets.”

Tesla’s are cool and emission-free. They are also pretty expensive. The Model 3 should start shipping mid-2017, if everything goes according to plan. Yet it remains to be seen whether the consumer market will be ready to spend US$35,000 on a non-gas-guzzling, not-too-powerful, quiet vehicle. People are used to their roaring engines, so Tesla has still a lot of work to do to convince the wider public that the affordable Tesla is worth their money. Especially if the OPEC freeze deal falls through and oil plunges again.

By Irina Slav for Oilprice.com

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  • GregSS on October 27 2016 said:
    "Yet it remains to be seen whether the consumer market will be ready to spend US$35,000 on a non-gas-guzzling, not-too-powerful, quiet vehicle"

    If we assume a fairly low price of $2.50 per gallon for gas, and an average of 25mpg, then the average car will consume $15,000 in gasoline over a distance of 150,000 miles. There will also be very little maintenance, no more oil and filter changes, tune ups etc. So possible savings of $20K over that 150,000? That makes a $35,000 vehicle a heck of a lot cheaper if it's going to save you that much over it's lifetime.

    EV's are coming - I'll leave the part about how soon world domination will occur to others :-)

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