If its production numbers hold up, Tesla (NASDAQ:TSLA) looks like a viable car company. In the second quarter, TSLA announced delivery of 92,500 vehicles. This number not only beat analysts’ expectations, but beat the company’s own internal estimate for 90,966. The Model 3 also seems to have a strong audience in Europe. Strong numbers in Europe will help ensure that TSLA stock is not a one-hit wonder.
Relieved investors have to love that for once Tesla under promised and over delivered. For Tesla stock watchers this has certainly not been the norm when it comes to Tesla and its CEO, Elon Musk.
However, despite the encouraging delivery outlook, fundamentals matter and Tesla is still not profitable. Not by a long shot. And investors, who expect more from Tesla stock, may be running out of patience. TSLA stock is significantly below its 52-week high of $387.46 and — at $226 as of this writing — is down nearly 28% for 2019.
Tesla Stock Still Looks Overvalued
Back in May, analysts at Evercore ISI said about Tesla: “The longer questions around execution and growth persist, the more difficult the valuation is to defend.”
Tesla’s current enterprise value is $49.6 million. Simply put, Tesla is valued like a visionary company. In reality, it’s a car company. And it’s a struggling one at that.
If Tesla can’t make its margin, the questions that surround its valuation will remain. And despite the company claiming that it will be profitable in Q3 and Q4 (and cash-flow positive from Q2 through Q4), profitability still seems elusive.
Tesla Is Supposed To Be More Than a Car Company
The Model 3 has an average selling price of $51,000, making it the volume seller of the Tesla fleet. But a $51,000 car without many of the technological advancements touted by Musk does not look like the “early adopter” that the higher priced models would attract.
Wedbush analyst Daniel Ives expresses the problem for Tesla stock:
“Europe demand thus far is a positive development for Tesla but it does not change the broader demand and profitability worries we continue to have on the story. In essence, unless self driving functionality and other software upgrades are sold with lower priced Model 3 units it will be a major challenge for Tesla to ramp its business model and gross margin profile in line with long term targets and therefore show profits on an ongoing basis. Sales of Model S/X continue to be very sluggish in the field and will weigh on Tesla’s margin profile which remains a real worry for Fremont and the bulls.”
In July, a leading online critic of Tesla, Tesla Charts made a compelling case that profitability for Tesla is a long way away. Using Tesla’s own data, Tesla Charts estimated the company needed to generate $1.453 billion in positive margin to turn a profit for the quarter.
Furthermore, they came up with a simple margin-per-vehicle estimate of $15,263 that would be needed for the company to break even. Although that number did not take into consideration leasing and other factors, it shows how difficult it will be for Tesla to turn a profit.
Tesla Is a Cult Brand
At the moment, Tesla is trying to get investors to focus on the delivery numbers. The good news is that they have a reasonable expectation that those numbers will continue to rise.
The problem for Tesla stock is that investors must believe in the company’s profitability. That means believing that Tesla is more than “just” a car company. It means believing that their Model Y SUV will launch on time and with sufficient demand. It means believing they can manage to get their production facility in China up and running.
Like any cult brand TSLA supporters will passionately defend what they see as a visionary brand. Visionary is certainly an adjective used to describe Elon Musk. But for visionary companies the road to profitability is typically more boring.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned stocks.