Here’s Why Tesla’s Latest Profit News Deserves Cautious Optimism

Tesla had a profitable quarter, while bigger promises that could reverse its fortunes loom large

If you’re the curious type like I am, you may roll over and check your phone each morning to see just how ludicrously high Tesla’s stock prices have gotten lately. For a bit of context, let’s consider the fact that the company’s shares were at less than $180 just last August. Today? Tesla’s stock has soared to $643 per share at time of writing, this latest surge coming on the back of its quarterly earnings call. For the second straight quarter, the company posted a profit and said it would “comfortably” build more than half a million cars this year.

So, that’s it then. Well done, Tesla, blow raspberries at the naysayers, etc. Well, not quite.

Tesla has gone from strength to strength since the Cybertruck reveal, and its profitability is definitely not something to ignore. The company’s success also bodes well for the EV industry as a whole. More production and sales signals the public’s growing confidence in electric cars, and that’s only going to spur on legacy automakers who are, by and large, dragging their feet on going toe-to-toe with the Silicon Valley-based company.

If you’re an investor, then the sky’s the limit at the moment. Per Tesla’s earning report and Reuters summary of the figures, the company increased its cash balance to $6.3 billion in the last quarter. Its revenue per unit rose 3 percent quarter-over-quarter, and its operating profit per vehicle increased by 19 percent. “In 2019, we managed to generate more than $1 billion of free cash flow while building a factory in Shanghai (which has since started delivering Model 3s) in record time and while building parts of Model Y production,” Tesla Chief Financial Officer Zach Kirkhorn said on the Wednesday post-earnings call.

The new Tesla Model Y

The Model Y is ahead of schedule, but there are still roadblocks ahead

On the flip side — the side that deserves some temperament to balance out the unbridled excitement at Tesla’s profits — there are some potential hiccups for the company in 2020. The most immediate concerns its Shanghai gigafactory, which only just went online. The recent outbreak of coronavirus from Wuhan, China (about 500 miles from Shanghai) may delay ramping up Model 3 production. The Chinese government ordered a shutdown of the factory due to growing concerns about the virus that has claimed 170 lives in China so far, and infected thousands more.

For Tesla’s part, Kirkhorn said a week or so delay “may slightly impact profitability for the quarter but is limited as the profit contribution from Model 3 Shanghai remains in the early stages.” Tesla is still evaluating whether the virus will impact the supply chain for its Fremont, California plant as well.

The Tesla Model Y is on its way

Tesla has started Model Y production at Fremont and will deliver vehicles by the end of March, well ahead of schedule. That’s according to Roth Capital Partners analyst Craig Irwin, whom Reuters noted in its report. Beyond that note, Irwin said, “For a company that has always been late, this is a big improvement.” And while Tesla may likely rally once more on accelerating the Model Y’s production, there are Musk’s other promises to consider. Two of those promises: the Roadster and the Semi.

Both were announced more than two years ago, yet neither have yet to see the light of day. Despite the hype and the pre-orders, Tesla needs to clear those hurdles to really capitalize on its upward trajectory. Then there’s the Cybertruck, which is still sort of in the ether as to when it’s actually coming. Yes, Tesla currently says it’s coming in late 2021. But for a company that has historically delayed its major launches — despite the Model Y news, a car that is largely based on the Model 3 that’s already in large-scale production — it’s worth taking that date with a grain of salt.

Finally, there’s the issue of profit per vehicle. This is an area where Tesla’s faced major losses as it ramped up Model S, Model X and Model 3 production. While Tesla is a much younger company, it will need to generate notable and consistent profit on each car it sells to maintain investor confidence in the long-term picture. As Facebook, Tesla’s neighboring tech giant, just lost $50 billion in market value due to increasing overhead, it’s reasonable to approach Tesla’s recent results with cautious optimism.