Tesla stock drops on Q2 losses

Originally designed for the mass market, the Model 3s are selling for an average of $50,000.

“Tesla is almost doubling all cumulative production every year,” Musk continued. “This is a totally mad thing. To make as many cars in a year as we have in our entire history and to have that be an ongoing trend. It’s difficult for people to really feel an exponential. We didn’t evolve to feel an exponential. We can feel a linear, but we can only really understand an exponential at a cognitive level.”

In its Q2 update letter, Tesla said it expects to return to profitability in the third quarter. The company had reported a profit in the third and fourth quarters of 2018 before recording losses in the first quarter (and now the second quarter) of 2019.

Despite Musk’s upbeat if complex framing, Tesla’s automotive gross margins contracted by 168 basis points year-over-year to 18.9 percent, explaining the hit to revenues despite the record sales. Key to the company’s viability is translating sales into profits. Slow demand for its more expensive models, the S and X, pose another problem.

“We’re not sure what the problem is,” said Musk, referring to lagging interest in these categories. “We’ll get to the bottom of it.”

The company continues to aim for positive GAAP net income beginning in the third quarter, the update letter said, “although continuous volume growth, capacity expansion and cash generation will remain the main focus.”

Tesla did end the quarter with a record $5.0 billion of cash and cash equivalents, putting the company on track to start producing Model 3s at its Chinese factory this year and the new Model Y by fall 2020.

During the earnings call, Musk said he viewed longterm demand for the Model 3 to take place in “the greater China region,” with sales expectations running about 5,000 cars per week.

As demand for the Model 3 soars, surveys show poor customer service remains one of Tesla’s biggest challenges. The company is opening new service centers “as fast as we can,” Musk said, adding that twenty five new service centers opened this quarter. Tesla has also made “massive improvements in terms of getting parts to service centers.”

The number one reason Tesla owners visit service centers, apparently, is to ask how to use Autopilot.

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