Published on September 24th, 2018 | by Zachary Shahan0
These 3 Graphs Show What Tesla Bears Are Lying To You About — $TSLA, Not $TSLAQ
September 24th, 2018 by Zachary Shahan
One of the things that irks me about supposed Tesla critics is that many of them pretend to be idiots and pretend that everyone else is an idiot.
But it’s actually not just about Tesla — it’s EV critics and concern trolls in general.
How many times have you heard the ridiculous claim that GM loses money on every Bolt it sells, that Fiat loses money on every 500e it sells, and of course that Tesla loses money on every car it sells?
Before I understood what such claims were actually referring to, I thought, “Well that’s stupid — one way or another, you wouldn’t sell a car you lose money on.” As I learned more about the actual numbers they were referring to, it got really stupid.
Basically, anyone making such ridiculous claims is throwing in all of the costs of the model’s R&D, manufacturing equipment, supplies and labor, and a few other things. They then divide those costs by the number of units sold of that car.
To fully get your head around the idea, consider that the company produces only one unit of that car. For example, imagine that Tesla sold only one Model 3 — just one. Naturally, all of the costs involved in getting the car to market are together higher than the revenue of one Model 3. Once Tesla produces 10, it still has a long way to go before it covers all of the costs of the R&D, manufacturing equipment, and so on. Once it produces 100, the company still hasn’t recouped all of the costs invested in that model.
Does that mean each car loses the company money? Of course not! What that means (as long as the car’s parts, labor, and a few other things don’t exceed the price of the car) is that each car is paying off a portion of those investments and once a certain number of units is produced, the company crosses a milestone where its entire historical balance for that model is in the black.
Image by Kirk Burgess
Kirk Burgess recently summarized it better than words can with the simple graph above, which is somewhat a joke, but spot on the money. The point too many TSLA bears are intentionally or unintentionally missing is that the Model 3 is hitting a crossover point where it recoups initial investment costs and the money that is pouring in from new orders actually turns the company profitable and starts a piggy bank for future products — a big piggy bank.
I asked Kirk more than 3 weeks ago if I could use that graph in an article and I kept it open to do so after he said yes. Incidentally, as usual, I waited a bit too long and the graph got more than a few eyeballs on it when Kirk tweeted it and Elon gave his stamp of approval with a ❤️ on Twitter. 🙂
However, the good news is that the support from Elon inspired Kirk and stimulated a more refined version of the graph — a version that is no longer as humorous but is more accurate and perhaps more useful for some people.
Got it? Once you sell enough cars, the revenue from those cars exceeds all of the money put into the company’s factories, stores, operations, etc. (“Enough” depends on various factors, including the gross margin on each car — or, in crude terms, how much more money a car’s selling price is compared to what it costs to produce that single car.)
This is not complicated once you just think about it. Certainly, it is not something the financial press and Wall Street analysts should have any trouble with. It is really absurd and a shame that many of them pretend Tesla can’t hit that crossover point, and more importantly, pretend that it’s impossible for Tesla to be doing so this quarter or next even though Tesla’s CEO and CFO have repeatedly said this is the general period of time when the company would pass that milestone.
The title mentions three graphs. Technically, the next one is a bar chart, but I assume you won’t crucify me for misleading clickbait. The chart it is helpful for showing a little more detail and history as to why Tesla has for years been spending more than it’s been making and why that’s now changing. Again, the chart is not precise — it was created by Maarten Vinkhuyzen just to convey a point that many people have been missing. It would be fun to see an actual chart on this topic from Tesla, but this will have to suffice unless Tesla rolls that out. Check it out:
The point being made there comes in parts: First of all, as we know, there are costs that go into development of a product. Then it takes some more time and more money to ramp up production. Then, once production is flowing, those costs are slowly (or quickly) recouped and there should eventually be a net profit from that product — unless the product is a dud (which the Model 3 obviously is not).
However, with each of those successful products, you can (as Tesla has done for years) immediately take the product’s profits and pump them into new products in order to grow the company beyond what is possible from that single good. In other words, the Model S and Model X make Tesla a lot of money, but rather than roll in the profits of those two models, Tesla has used the extra cash to help build the Gigafactory, Model 3, Model Y, Semi, Roadster 2.0, etc.
Tesla has been pumping all of its surplus revenue, and more, into new product development and production. In my humble opinion, that is what all Tesla investors should have wanted up to this stage.
Now, the thing that has recently changed is that Tesla has decided to turn a profit across the company and then stay profitable indefinitely. Whether that shift is due to stock and brand manipulation on Wall Street and in the media or is just a natural result of where Tesla is today, it’s unclear, but it doesn’t really matter anyway. What matters is that Tesla is apparently crossing a point where it no longer has to deal with concern trolls who claim that they are worried about Tesla and its finances. Tesla can just turn a profit and shake a handful of gremlins off its back.
But aside from the trolls and big-money interests that would rather see Tesla fail, the points all of us should be clear about are simple: Tesla has made a ton of money on the Model S and Model X, money that was pumped into rapid growth. Tesla also recently crossed the point where the Model 3’s revenue surpassed its costs and, combined with S and X revenue, is greater than additional company investments, making the company profitable. The future is looking bright for Tesla as far as I can see. (Not investment advice — we are not investment advisors.)