July 3, 2019 / 3:27 AM / 3 months ago

Breakingviews - Tesla's return to growth is only half the ride

FILE PHOTO: FILE PHOTO: Flags fly over the Tesla Inc. Gigafactory 2, also known as RiverBend, a joint venture with Panasonic to produce solar panels and roof tiles in Buffalo, New York, U.S., August 2, 2018. REUTERS/Brendan McDermid/File Photo/File Photo

NEW YORK (Reuters Breakingviews) - Elon Musk has relieved some of the pressure bearing down on his electric-car maker. Tesla has bounced back from a poor first quarter by posting record sales for the three months to the end of June. But the company’s drive back to growth is only half the ride.

The $40 billion outfit revealed late Tuesday that it had handed customers the keys to some 95,000 vehicles last quarter. That’s 51% more than in the previous three months, a dismal performance that led to a $700 million loss for the period. The improvement should be a relief for investors on two fronts. First, it ought to quell fears that demand for the mass-market Model 3 has dropped. Also, on this performance Tesla’s cash burn ought to be much reduced. That explains why the stock jumped 7% in after-hours trading.

But the numbers don’t restore Tesla’s status as a fast-growth company. Overall production of around 87,000 cars was barely higher than the previous record set in last year’s fourth quarter. There’s also the chance that customers in the United States rushed to buy a Tesla before a federal tax credit halved to just under $2,000 at the end of June. A previous cut in the credit six months earlier contributed to the poor first-quarter showing.

The record-setting sales may not pull Tesla into the black in any case. Making money on the Model 3 was hard enough six months ago when the average price was just below $60,000. But Musk recently introduced cheaper variants, which will drag down margins. Moreover, the company delivered fewer than 18,000 of the high-margin S and X vehicles last quarter. While better than the previous three months, it leaves the first-half total at just 60% of the 2017-2018 run rate. It suggests that Tesla vehicles are susceptible to competition – Audi, Porsche and Jaguar all now have rival offerings on the roads.

Musk has been pushing Tesla to cut costs, but fixing poor-quality cars and shoddy after-sales service requires investment. And capital expenditure needs a boost, with barely a tenth of his 2019 target of $2.5 billion spent in the first quarter. Getting production and sales cranking again is encouraging, but turning a profit remains tough.

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