Tesla Q4 2019: Remains Profitable; Focuses on Fast Growth

Tesla posted its Q4 2019 results, increasing its total automotive revenues in 2019 over 2018. Even though the company managed profitability for two consecutive quarters (Q3 and Q4), it posted a loss for full-year 2019. Below are the key takeaways from Tesla’s Q4 2019 earnings call:

Financials – Tesla’s automotive revenues increased from US$18.5 billion in 2018 to US$20.8 billion in 2019. The revenue benefited from growing deliveries, but was adversely affected by an increasing lease mix, an increasing share of cheaper (and less profitable) Model 3 cars, the introduction of lower-priced Standard Range Model 3 and adjustments in vehicle pricing. While the company remained profitable during Q3 and Q4 2019 (at US$ 105 million), it lost US$ 862 million for the full year of 2019.

Model Y to Launch Early with Extended Range – Tesla announced that it will begin delivering Performance and Long Range variants of Model Y by March 2020, months ahead of scheduled launch during ‘fall 2020’. The all-wheel-drive Model Y will also come with an extended Environmental Protection Agency (EPA) range of 315 miles compared to the previously announced 218 miles. However, the cheaper standard variant of Model Y with a range of 230 miles will only be launched during 2021.

The early launch is likely a response to Ford’s Mustang Mach E, which is similarly sized and priced. The increased range of the Model Y will act as a competitive advantage against the Mustang and other similarly priced EVs from mainstream manufacturers.

In addition, with the early launch, Tesla can cash in on the initial demand and buzz around Model Y. With the company expecting higher margins on Model Y compared to Model 3, an increasing share of Model Y should benefit the company on both top and bottom lines. Tesla is aiming for localisation in components and manufacturing for Model Y in the US, Europe, and China, which will help it to better manage its costs.

Exhibit 1: Tesla Cars Production and Deliveries in 2019

Counterpoint Tesla Production and Deliveries in 2019

Premium Connectivity – In December 2019, Tesla announced a US$10 monthly subscription plan for premium connectivity, which uses an additional cellular connection (along with wifi in standard connectivity) and adds services like live traffic visualization, in-car streaming music & media. All cars sold before July 2018 already have life-time premium connectivity included.

There are close to a million Teslas on the road, and it is important for Tesla to access the valuable driver data. However, the increasing number of vehicles on the road is also increasing the cost of data uploaded/downloaded to the car. To offset some of this expense and to open new revenue streams, the company has introduced subscription plans for premium connectivity.

Tesla Insurance – Tesla is increasing its focus on insurance services, and plans to extend its insurance services beyond California. Tesla can make use of the driver data it collects from (connected) cars to better offer its services and price them competitively compared to competitors.

Forecast – The company forecasted more than 500,000 unit sales during 2020. Despite declining Tesla sales in the US, and a slowdown in China, Counterpoint expects Tesla to achieve its target of selling more than 500,000 vehicles during 2020, driven by increasing Model 3 sales in China. Tesla is also planning to develop Model Y capacity in China to be at least equivalent to its Model 3 capacity of 150,000 cars per year. China is a huge market for EVs and Tesla will get good initial demand thanks to its brand image and popularity among young, tech savvy market segments. The sales will also benefit from growing European demand.

Demand for Tesla remains strong, with the company maintaining a low inventory of 11 days during Q4 2019. Tesla noted that most of its orders in 2019 came from new customers having no prior reservations, indicating an increasing reach for the company.