NEW YORK (Reuters Breakingviews) - Elon Musk’s 2019 is shaping up to be a matter of flourish or fold. Tesla’s chief executive presided over a $139 million fourth-quarter profit, unveiled after markets closed on Wednesday. Trouble is, it took cost cuts at the $53 billion electric-car maker to eke out even that, which was less than half the profit in the previous three months – itself Tesla’s first black ink in ages.
One big challenge is slowing growth. Revenue from automotive sales increased just 3.3 percent in the fourth quarter from the third, despite a big push to persuade Americans to buy vehicles before a $7,500 tax credit for Tesla buyers was halved at the end of December. The company has since dropped prices on all its vehicles.
The implication may be that U.S. demand for the supposedly mass-market Model 3 is tapering off. It may change once Tesla starts selling the $35,000 version. But that’s 41 percent below the average sticker price to date, so the company will have to sell far more cars to make up the revenue. And rivals from BMW to General Motors are spending heavily to erase Tesla’s electric-vehicle lead.
Meanwhile, automotive-sales costs increased faster than the unit’s top line. Tesla is bringing down some expenses, including a nearly $200 million cut to capital expenditure in the final three months of the year. Earlier this month, Musk said he would lay off 7 percent of the workforce.
The net result so far is that Tesla had some $3.7 billion of accessible cash on its balance sheet at the end of 2018, though a quarter of that is probably needed to pay off a convertible bond coming due in March. The question is whether that’s enough.
Slowing sales growth and lower prices could mean less free cash flow. Meanwhile, Musk may need to invest more to fund developments like the Model Y and the Semi truck.
Also, the cuts may prove damagingly deep. Customer gripes already abound. Owners have taken to social media to detail everything from faulty software to dodgy paint jobs. Cold weather has prompted complaints about poor battery life.
The company can get over all this if it electrifies Model 3 sales overseas once it starts shipping large volumes to Europe and China. Without that boost, Musk will struggle to demonstrate Tesla’s staying power.
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