Tesla Inc. continues to lose money as it sells more cars. On Wednesday, the electric car company announced a second-quarter net loss of $408 million.
Tesla bulls say that’s a welcome improvement compared with losses of more than $702 million in the previous quarter and $742 million in the second quarter of 2018. To Tesla bears, it shows the company can’t earn annual profits under its current structure and business strategy. Tesla’s share price dropped 11% in after-hours trading.
Even more stunning than the loss, however, was the announcement that Chief Technology Officer J.B. Straubel is leaving Tesla.
Straubel goes back to the beginnings of Tesla. In 2004 he and Chief Executive Elon Musk linked up with founders Martin Eberhard and Marc Tarpenning, who had started the company a year earlier. After the original founders left Tesla a few years later, it was Musk and Straubel who led the company to its present state.
Straubel, 43, told stock analysts Wednesday that “this is not a lack of confidence in the company or the team or anything like that.” He said he’ll “stay involved in the core technologies” and “help where I can” as an advisor but not in an executive role. Straubel will be replaced by Drew Baglino, Tesla’s vice president for technology.
The company delivered a record 95,200 cars in the second quarter on the strength of its Model 3 compact sedan. That topped the previous record of 90,966 cars in the fourth quarter of 2018.
Although it sold more cars this time, Tesla’s revenue was lower: $5.3 billion, compared with $6.3 billion in the fourth quarter.
That’s because Model 3s carry a lower price — and profit margin — than older-model S and X vehicles, and Tesla has cut prices of all models.
The price cuts are evidence that Tesla has a demand problem, said Mark Spiegel, whose Stanphyl Capital hedge fund is betting the company’s stock price will dive. “Any thinking person knows you don’t cut prices on your product unless you have to,” he said.
In the same conference call with investors, Musk said that “demand in Q3 will exceed Q2" and that results in the next two quarters and 2019 will be “incredible.” He insisted that “Tesla is growing at an exponential rate,” the second-quarter results notwithstanding.
Unless costs are also falling, price cuts will reduce profits. With a high overhead that includes auto and battery factories, a car-charging network, and company-owned sales and service centers, Tesla has found serious cost cutting to be a challenge. And its stock, though hit hard this year, is still priced as if investors expect massive profit growth.
Pricing will remain under pressure as federal subsidies run out for Tesla buyers. Starting July 1, the federal tax credit for Tesla fell to $1,875 from $3,750. A previous cut in the subsidy amount in January, from $7,500, dragged down sales and profits in Tesla’s first quarter. Tesla’s subsidy will disappear in January unless Congress renews it. In the meantime, buyers of electric cars from Jaguar, Audi, Mercedes-Benz and others still qualify for the full $7,500 rebate.
“If the price you’re charging for your product is dropping faster than your cost of producing that product, there is no way you can switch from losing money to making money,” Spiegel said.
But Tesla bull Ross Gerber, head of the Gerber Kawasaki investment management firm in Santa Monica, sees Tesla making progress on costs. He prefers to see Tesla’s high levels of management turnover not as a problem but as an opportunity for Musk to promote better managers. “Tesla was so poorly run a few years ago, but the amount of cost benefits they’re getting under Jerome Guillen is remarkable,” Gerber said.
Guillen, a former Daimler executive who had been running Tesla’s semi-truck project, was put in charge of the company’s Fremont, Calif., auto factory last year. That came after an extreme attempt to automate Model 3 production that went awry. As robots were ripped out, Guillen redirected Model 3 assembly through a giant tent, which drew hoots from critics but stabilized production.
But costs are hardly the only issue. Even while overall customer satisfaction remains high and positive reviews flow from auto enthusiast magazines and websites, Tesla continues to struggle with quality problems and customer complaints about service. If not fixed, those problems probably would limit demand.
Wednesday’s Tesla announcement isn’t the last word on second-quarter results. The company’s government filing will be released in coming weeks. In the past, Tesla has included details on revenue and profits that didn’t appear in its original announcements, such as cash received from selling clean-air credits to other automakers.
Musk can keep his Tesla dream alive and still lose money, as long as capital markets keep funneling cash his way. This year, Tesla has raised $2.7 billion in equity and debt.
Tesla’s stock, always volatile, has been been on a roller coaster all year. It closed at a year-to-date high of $335.35 in January. After sales dived in the first quarter because of logistics problems in Europe, according to Tesla, shares plunged as low as $178.97, and since have rallied. They closed Wednesday at $264.88, up 1.8%.
Executives have been fleeing Tesla by the dozens. Chief Financial Officer Deepak Ahuja departed last year, as did several other highly placed finance executives and members of Tesla’s legal team. Until recently, Straubel and Musk were the only executives listed on the company’s leadership page. Today, both Musk’s and Straubel’s names were removed.