Will Model 3 Generate Profits for Tesla Motors Inc (TSLA)?

March 2, 2016

Peter Siphron, Senior Vice President at Siphron Capital Management, says Tesla Motors Inc (TSLA) may finally see profits from its lower-priced Model 3 car. As such, he says there are many ways in which Tesla distinguishes itself from other automobile companies.

The first distinction that comes to mind is how Tesla doesn’t want physical dealerships across the 50 states. They would like to have an on-demand sales model… ultimately, they want to make their cars to order and not have the overhead or the cost structure that typical dealerships representing the Nissans and Fords and Chryslers do.

Their entire fleet is electric. They sell only zero-emissions cars and don’t have any of the legacy issues associated with traditional, internal-combustion automobiles. Just look at the Gigafactory that they have established in Nevada, which is going to provide the battery packs, or engines, for their electric vehicles. So this is being done on an unprecedented scale in the electric-vehicle market. And even before they get that Gigafactory up to capacity, they are already siting out a second one that probably will end up being in Europe or Asia somewhere.

We know they have plans for the Model 3, or the lower-priced version of their electric vehicle, coming out within the next 18 to 24 months, but they have been historically a little optimistic about the delivery dates. But regardless of when the Model 3 comes off the production line, you will have a dramatically lower price per vehicle at presumably a much higher volume. It all boils down to whether or not Tesla makes money on their cars.

Here we get to the three key metrics that generate profits: volume, cost and price. So Tesla’s ability to balance the cost of the production of all those vehicles with the volume they can sell and the differential between price and cost is what’s going to potentially generate profits.