Comment by abtinf | Hacker News Reader

Comment by abtinf | Hacker News Reader

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>Tesla isn't profitable

On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30% [1]. However, they are obviously still in startup mode, so they reinvest all of those earnings along with investor capital into improving the business.

>Cutting the price means they have to produce at a far lower cost while expanding factory capacity.

Corporate finance is a little more nuanced than that. The price of expanding factory capacity is not an interesting number by itself; what matters is whether that investment will yield a profit over its useful life. Or, in more technical jargon, over the useful life of this investment, will marginal revenue per unit made possible by this investment exceed average total cost of producing units with this investment. Moreover, a dramatic expansion of capacity, executed competently, will reduce production costs across all product lines due to economies of scale, economies of scope, and improved negotiating power.

>But with near-zero interest rates, and lots of pre-orders, they can probably borrow heavily for plant at very low cost.

Tesla's credit rating is in junk bond territory [2] and their weighted average cost of capital is almost 9% (which includes interest free loans from pre-order reservation payments). So there isn't a lot of financial magic here - they need to produce units profitably to be successful.

[1] http://seekingalpha.com/article/855661-tesla-profit-point [2] http://www.businessinsider.com/tesla-rated-junk-by-sp-2014-5

> On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30% [1].

I didn't read the article, but it's from 2012. Gross margins hace declined from 27.6% in 2014 to 22.8%. In fact in the fourth quarter the gross margin was just 18%, below Toyota, Daimler, BMW, Nissan, Renault, Hyunday, Kia (all in the range 18.9-20.1%) and Honda (22.9%). To be fair it was 19.2% for Tesla's automotive division. And after excluding a number of nasty thing the company can get to a better looking 25%. But I'm not sure this qualifies as "wildly profitable".

Maybe it's worldbeating in the class of companies that are building sizable hardware factories, setting up near-global sales channels and still haven't launched five products. And maybe it isn't; I can't think of many such companies, can you?

On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30%

OK, I searched for "30%" in your link and nothing came up. So I scanned and saw nothing that claimed a gross margin of 30%. Where's it hiding?

I assume by gross margin you mean, "revenue - COGS". This of course ignores all the fixed costs, so it doesn't mean much. Even if they weren't investing in future growth, their fix costs could easily drag that 30% (still don't know where that came from) down into negative territory.

> This of course ignores all the fixed costs, so it doesn't mean much.

Au contraire, my friend. In business finance there are roughly 2 methods to calculate costs per unit: direct costing (DC) and absorption costing (AC) and they both have their benefits/disadvantages.

DC is where you leave out fixed costs to estimate if you will ever reach economics of scale. If a growth in production doesn't lead to diminishing marginal costs under the DC method, then you can never reach profitability under AC.

As long as DC leads to gross margin profits, there's hope of economies of scale and "all" you need to do is to increase production to make it work.

Of course this distinction doesn't apply for accounting and your P&L (however there are ways to get 'creative' with costs and depreciation there as well) so this is purely about decision making: should I build product/factory or not?

While I agree fixed costs shouldn't be ignored, isn't it true that they are called fixed costs for a reason? As in, as Tesla scales up production and is selling way more cars, their fixed cost per unit sold will go down with economies of scale. I think gross margin is much more meaningful here, but definitely correct me if I'm wrong.

Fixed costs aren't totally fixed, it's just that they won't change for every unit produced. But it may be the case that they will change when you produce say an additional 100 units (or 1,000 or 10,000 units).

So if you ramp up production and you need for example an additional factory, that means your fixed costs will go up.

>While I agree fixed costs shouldn't be ignored, isn't it true that they are called fixed costs for a reason

Building cars is a capital and R&D intensive business. I'm not sure where the idea that those costs will basically go away comes form.

They don't "go away", they get divided amongst a greater number of cars as production ramps up.

It's not even just Tesla cars, as other electric cars come to market, the prices for components they need in common (battery being the big one) will fall with scale too.

The battery is about half the cost of an electric car and battery prices have been dropping steadily, between 2007 and 2014 it halved (if you look a the whole market) or reduced by 2/3rds (if you look at leading manufacturers like Tesla) and are projected to continue to decline by 8-10% per year.

>On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30%

SeekingAlpha is basically a collection of blogs to which anyone can contribute. If you spend any time there, you'd know "articles" are all over the map. I'm not sure that constitutes a good source.

Agreed. I would consider SeekingAlpha good for sentiment analysis and little else. You may as well quote twitter.

> On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30% [1]. However, they are obviously still in startup mode, so they reinvest all of those earnings along with investor capital into improving the business.

They would still report a profit under this scenario.

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