Tesla’s Profitability prospects
Disclaimer: this is not investment advice. I’m not objective on Tesla since I’m a firm believer in their mission. I do own Tesla stock.
Before taking any investment decision, do your own research.
There’s always a lot of drama with Tesla having so many people with different interests: Tesla fanboys, tree huggers, short sellers, oil industry, car industry, car dealers, utilities, etc. Having a vocal and controversial CEO doesn’t help.
Because of this drama it’s difficult to pay attention to what matters the most. This post is an attempt to “guesstimate” Tesla’s profitability prospects for Q3. I’m going to link to the data and explain my reasoning as an exercise for myself and for the hope that someone finds it useful.
Assumptions
All numbers are based on changes expected compared to Q2 2018, so that the final result is comparable to Q2 loss from operations and net loss and check for profitability.
First I’ll go through each factor that I think plays a part in Q3's results explaining my assumptions and reasoning for each.
Gross profits
There are several factor that will improve gross profits.
First, Tesla seems to be on track to produce more than the 50,000 Model 3s guided as a lower bound in the last earnings call. Also quite a lot of Model S/X.
Second, average selling price for Model 3 is going higher:
Third, as expected, Model 3 production is getting more efficient:
Which I expect to impact in gross margins in a big way. Assuming that between the higher ASP and reduced labor the margin for Model 3 is as guided at 15% or increasing to 20%, we can estimate the increment in gross profit:


One time restructuring costs
This is an easy one: in Q2 Tesla fired 9% of the work force to improve efficiency in the organization. The cost of firing the employees was detailed in the report as 103 million dollars.
Selling, general and administrative savings
Tesla stated that most of the employees fired were from SGA part of the company. Based on other estimates I’ve seen and comparing to Q2'17, I estimate a range of 70–150 million savings per quarter.
ZEV Credits
Electrek estimates 125 million to 170 million in ZEV credits earned in Q2. I haven’t seen Tesla ever selling more than 100 million, so I estimate that as a lower bound (100–170 million estimate)
Services ramp up
Bernstein analyst Toni Sacconaghi Jr. complained that Tesla’s huge drop in services margin for Q2 don’t add up and speculates that the company is hiding auto losses there. I don’t agree with his premise since Tesla needs to increase it’s service offering enormously to be able to attend for exponentially growing customer base. I expected service ramp up to produce big negative margins for a couple of quarters.
I’m not sure if the ramp up is going to be higher or lower in Q3 compared to Q2. I estimate a range of -200 million to 50 million improvement for this factor.
Profitability?
Let’s see how the numbers add up:

In Q2 Tesla’s operations loss where 621 million. Net loss was 742 million. If it’s closer to the lower bound, it could have a slight operating loss. But if it’s close to the upper bound, it would be highly profitable.
What about cash flow?
My perspective on cash flow is even better.
The increasing count of Model 3 produced each quarter creates a cash float based on delayed providers payments. In the last earnings call an analyst said his estimates on that where about 20,000 per car, which Deepak Anujah said was “order of magnitude correct.” If we use 10,000 per Model 3 estimate, that would add 340 million positive cash flow from financing activities.
I also expect a big drop in capital expenditures since Model 3 ramp up is almost done in CapEx and there are no other large projects going. They may start growing Gigafactory 1 again this quarter, but I don’t expect too much expansion until next year.

