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Water into wine

4 November 2015 By Antony Currie, Kevin Allison

Elon Musk has just pulled off an impressive magic trick. Tesla’s chief executive managed to turn a rounding error in third-quarter vehicle deliveries into a $2.5 billion boost to his company’s market worth. It relied on some classic irrational shareholder exuberance to value a sliver of good news above an earnings miss. But as Tesla expands, that may prove harder to do.

Tesla managed to put 11,603 cars into customers’ driveways during the three months to September. That’s just 23 more than the company estimated last month. Assuming an average sale price of $75,000, these added a mere $1.7 million to what was a $1.24 billion top line for the quarter.

Granted, it’s a rare upward revision to delivery numbers after Tesla several times in the past few months was forced to cut its estimates. That doesn’t, though, justify the whopping 1,453 multiple shareholders appear to have ascribed to the extra revenue.

It may be that the minor improvement has given enough shareholders comfort that Tesla will definitely hit its current target of delivering between 50,000 and 52,000 cars this year.

That’s still too low to drive Musk’s company into decent profitability any time soon – and last quarter it lost $75 million, after excluding some items.

Scale is the key to improving margins in the auto business. Tesla hopes to have an average of up to 1,800 finished Model S and Model X cars rolling off its California assembly line per week next year. That’s a 50 percent increase from its third-quarter showing, not counting a week of factory downtime.

Tesla, though will still be a tiddler compared with established automakers whose annual production ranks in the millions. And Musk still has to develop the so-called Model 3. That’s the mass-market car he hopes to sell for $35,000 a pop by 2017.

That costs money. And Tesla burned through almost $500 million in the third quarter. Departing finance chief Deepak Ahuja told investors on Tuesday that the company has an “aspiration” to be adding cash to the balance sheet by next year’s first quarter. The larger Tesla gets, the more such statements will take on greater meaning to investors than conjuring up a few extra deliveries.


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