It's time to panic about Tesla's flatlining revenue
- Tesla reports third-quarter earnings on Wednesday after the markets close.
- Analysts expect the company to post a loss, but more worryingly, they also don't expect top-line revenue growth.
- Tesla can't continue to lose money to grow its business if it flatlines on revenue.
- The company's only options would then be endless capital raises and debt issuances.
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Tesla reports third-quarter earnings on Wednesday after the markets close, and analysts estimate that the car maker could post a loss of $0.46 per share, versus a hefty profit a year ago of $2.90.
Tesla profits are the exception rather than the rule, despite every other automaker on the planet being pretty much in positive territory every quarter for the past eight years. What's more concerning is Tesla flatlining revenue: the top-line for Q3 could come in at about $6.5 billion, down from nearly $7 billion a year ago.
Tesla is supposed to be selling a lot more cars in 2019 than 2018's roughly 250,000, so the flagging revenue growth is very, very, very not good.
Tesla is selling cheaper vehicles now than it has in the past, but it has been reliably adding about half a billion in revenue each quarter. For bulls, it was only a matter of time before an ascending top-line yielded a more consistent bottom line, assuming Tesla could avoid overspending.
Make no mistake, this trend can't continue if investors don't want Tesla to return to the markets ad nauseam to raise more cash, either by issuing new equity or selling debt. If they don't care, well, then that's how the story is now setting up. Settle in for year after year of agony on that score.
The upshot is that Tesla has now rolled out three vehicles that have been money losers: Model S and Model X has pricing that should have generated luxury margins, but Tesla followed its master plans and sank the cash flow into the less expensive, higher-volume Model 3, whose pricing has thus far been all over the place, but whose sales tally isn't getting Tesla any closer to profitability, and the vehicle was launched in 2017.
Next up, the Model Y, a crossover SUV that could outsell the Model 3 - and, if the pattern holds, also lose money.
Topline, topline, topline
Bluntly, the way that car companies make money off selling cars (versus financing them, a more lucrative business) is to either price them high and chase affluent customers, limiting volumes, or by building dozens of models, selling big numbers, and extracting a skinny margin from that oceanic slosh of cash.
Tesla hasn't made money on either model, but there was hope that it would eventually settle into a conventional approach and disconnect itself from its capital-markets lifeline.
This obviously isn't going to happen, which means that if Tesla intends to pursue more growth - especially in China - it's going to remain a ward of Wall Street. This is sort of a disaster for the company because the stock should continue to be a battleground. If Tesla can't use vehicle sales to bolster its balance sheet, then cash could always and forever be coming from different places.
One might think that the bad revenue trend could reverse with a new vehicle hitting the market, but Tesla's pattern thus far has been for a new car to cut into sales of the older models. Making this difficulty worse is that the Model Y is an SUV while the Model 3 is a sedan, and sedans have collapsed in popularity in Tesla's home market. With the electric-vehicle market still tiny, Tesla could be confronting what amounts to a future sales swap, as customers abandon the Model 3 and rush to the Model Y.
The usual fixations for Wall Street when Tesla reports have been on sales, guidance for future sales, cash burn, and prospective profits. Revenue growth was taken for granted.
It can't be any longer, and that's something that investors could justifiably panic about.