The Palo Alto automaker reported Wednesday that research and development expenses are rising, revenue from selling environmental credits is falling and its next model, the Model X sport-utility vehicle, is delayed.
Investors didn't like the news.
Tesla's stock fell $22.76, or more than 11%, to $178.59 as of Thursday's market close. The shares are now down nearly 30% from their peak of $254.84 on March 4.
Two key questions emerged from the company's financials: Can the company lower its high costs with the planned construction of a battery factory? And can it effectively compete with major automakers, such as BMW, now planning high-end, eco-friendly cars?
Meanwhile, Tesla's revenue from sales of California environmental credits dropped to zero in the first quarter. In the same quarter a year earlier, $68 million in credit sales helped power the company to its first quarterly profit of $11.2 million, setting off a flurry of investments on Wall Street.
The credits were created by California pollution officials as an incentive for automakers to produce zero-emission vehicles. The state grants makers electric or hydrogen fuel-cell vehicles credits they can sell to other automakers. Those automakers, in turn, can use the credits in lieu of meeting state requirements for building zero-emissions vehicles.
What's up with the Gigafactory?
Tesla's battery supply, however, will be more crucial to sustaining the business in the long term.
The automaker plans to build a massive battery factory that it says will drive down the cost of the cells that go into its cars about 30%. It needs both an adequate supply and lower cost to improve the profit margins on its luxury Model S sedan and its pending Model X sport-utility vehicle.
Lower-cost batteries will also are important for to Tesla's plans for less expensive, higher volume electric car.
Tesla announced this year that it would spend $4 billion to $5 billion on one factory that could employ up to 6,500 workers. Panasonic is a partner in the project.
But the automaker said Wednesday that it will break ground on two different sites in the coming months.
This will guard against any unforeseen delays at one location. Tesla will at least have the ground graded and a foundation in place to launch work on the second.
"At least one of those sites will go rapidly to completion," Tesla spokesman Simon Sproule said Thursday. "The question as to whether there will be more than one is still to be determined."
Sproule said the factory would allow Tesla to increase Model S volume, launch the Model X and offer the lower-cost generation three vehicle sometime in 2017.
"Without batteries, we can't make cars," he said.
Tesla previously said the so-called Gigafactory will be built in either Arizona, Nevada, New Mexico or Texas. Now Tesla Chief Executive
“The reason why we don’t hear anything is because there are a lot of discussions and negotiations going on behind closed doors,” said Thilo Koslowski, an analyst at
Morgan Stanley analyst Adam Jonas said unanswered questions about the Gigafactory cause concern.
"Our biggest worry is the continued lack of formal commitment from Tesla's Giga partners," Jonas said. "As holes in various deserts are dug, does Tesla suffer a loss in negotiating power?"
Sproule said the partners will come along as the project gets going.
"Others will join based on their ability to supply various components and parts of the battery pack," he said. "Think of this as an industrial park under one roof."
Competitors gaining on Tesla
Tesla's sales have leveled out in the U.S. Through the first four months of this year, the company has sold 6,100 of its Model S sedans, just 19 more than it did during the same period a year earlier.
Meanwhile, the Model X is delayed until well into next year, and it will be several years before Tesla has its less expensive "Gen three" car in the marketplace.
Musk said Wednesday that the Model X delay is the result of Tesla wanting to make sure the vehicle works as billed and doesn't disappoint customers.
Tesla said that it is misleading to look at sales as a proxy for demand for the car. The company is still ramping up manufacturing at its auto factory in Fremont, Calif., and Tesla production has been crimped by low battery supplies. Musk said that should start to ease later this year.
But Koslowski said Tesla needs the new models to maintain consumer interest.
"Tesla needs to be aware that the more it delays future products and doesn't refresh the models that it has, the more risk it faces from competition in the industry," Koslowski said.
That's already starting. Two cars -- BMW's electric i3 and its i8, a plug-in hybrid sports car -- pose an immediate threat to Tesla, said Brian Johnson, an analyst with Barclays Capital.
"Tesla's target audience is likely sandwiched between the two i-brand models," Johnson said. "The i3 may be smaller and with a lower range, but we think it will appeal to the same type of 'sustainable' driver as Tesla's Model S, though maybe a slightly less flashy one."
The i8 is a higher-end, more expensive sports car that could cut into sales of the Model S.
"We continue to see some risk of U.S. Model S demand plateauing, with increased competition from BMW also adding to the risk," Johnson said.
Meanwhile, Nissan has said that it is developing a second-generation Leaf that will come onto the market about the same time as Tesla's "Gen three" car. The new Leaf will have dramatically changed styling and a much longer driving range. It's likely to sell for less than the comparable Tesla model.
Tesla doesn't seem concerned. Sproule noted that the Model S has sold well since its introduction two years ago even though it was competing in the "brutally competitive luxury market."