Tesla vaporized Wall Street expectations on Wednesday when the company swung to a quarterly profit. Tesla has posted third-quarter profits before, but this time around, the mechanism behind the margin was somewhat different.
There was some deferred revenue that the all-electric car maker collected, but mostly, Tesla reined in spending and cut costs. The balance sheet now shows $5.3 billion in cash, quite a lot by Tesla's standards, a level that raises the question of why a company in theoretical growth mode spent less than $400 million for the quarter.
The obvious answer is that Tesla's revenue is sliding. For Q3, it landed much closer to $6 billion than the 2018 quarter's $7 billion. Simple math takes over here: less money coming in demands less money going out, to yield a positive bottom line. For the quarter, that equation spit out a thin surplus of $143 million. Tesla used the oldest trick in the business book: it cut its way to profitability.
Make no mistake, Tesla can run a business on this basis: $6 to $7 billion in revenue every three months, a meager profit, endlessly refinanced debt to cover the operating gaps. That doesn't really look like a world-beater, of course. Rather, it looks like a steady state sort of business that should in no way be worth more than $50 billion.
The next question is whether that's preferable to Tesla's financial model of the past decade and a half, which is basically to take capital and incinerate it, promising only wild stock-trading volatility in return.
The new, boring, frugal Tesla
Personally, I'd take the boring, essentially nonmargin business at this point. I'd rather have a more exciting, fat-margin luxury electric-vehicle business, but CEO Elon Musk appears to want to kill that off by sunsetting his highest-margin cars, the Model S sedan and Model X SUV.
However, I'm not going to argue with discipline. It undermines the #TSLAQ bankruptcy position, which has drifted into unhinged territory since Musk's ill-fated go-private scheme, the "funding secured" debacle of 2018.
Discipline does mean that Tesla is now clearly a car company, rather than a tech company or an energy company or some other kind of curlicued Silicon Valley fantasia. Sure, it took Musk and his people over 15 years to figure this out, but at least they seem to have finally gotten the message.
So welcome to the Age of Scarcity Tesla. I've been concerned about the company's revenue slide for a few quarters now. It's not obvious that the company's once-robust revenue expansion has ended, but if it's now bound by a $6 to $7 billion range, and Tesla wants to avoid larding upon the balance sheet with debt, then future spending should continue to be fussy.
Yes, launching the Model Y crossover next year and spooling up a factory in China could shatter this newfound cost discipline. But thus far, Tesla has been building and selling a lot more vehicles without killing itself on cost of sales.
A ruthlessly efficient Tesla takes us into uncharted territory. But it's certainly encouraging.