Tesla’s (NASDAQ:TSLA) Q3 2019 earnings have finally provided bulls with the horns they need to push TSLA bears back into their caves. Since then, Tesla shares have continued to rise. As of this writing, Tesla stock is trading up 7.70 percent at $322.77 per share.
This past year has not been the easiest for the electric car company. Tesla and Elon Musk have had to whether through misinterpretations and an overall negative narrative. Through it all, bulls have stayed with the company, hoping for Tesla to pull through.
Before the Q3 earnings results were announced, bulls tempered their expectations. Elon Musk’s decision to stay silent on Twitter days before the call did not help the situation. Thus, several of the bulls were a little shaken while the bears were filing their claws.
No one expected to hear Tesla was GAAP profitable and the company was actually ahead of schedule in a lot of their projects, like Gigafactory 3 and Model Y production. Through its Q3 report, Tesla showed that it is far too early to discount their efforts.
Now, it appears that bears have scrambled for the next argument, the next angle, to push their narrative. This time around, they’ve settled on questioning the sustainability of Tesla’s Q3 earnings. But the bulls were prepared for it.
People shouldn't be so shocked that Tesla was able to reduce costs. Of all the Model 3s ever made, ~22% were made in Q3 2019.— Sam Korus (@skorusARK) October 24, 2019
Given that cumulative increase, Wright's law suggests ~$2,000 cost improvement per car for the Model 3. https://t.co/nzrMEVzeKi
Using Wright’s Law, Sam Korus from ARK Invest argued that Tesla’s profit would only increase with time. In simple terms, Wright’s Law states that more experience equals more progress. Tesla’s Model 3 production and Q3 earnings shows the law in action.
According to Korus, Tesla produced 22 percent or one-fifth of all Model’s 3 they’ve ever made in Q3 2019. This means the electric car maker made more cars in Q3 than any of the previous quarters. Despite this, Tesla reduced costs and turned a profit.
Tesla’s Q3 success is the result of their increase in efficiency due to past experiences. The more cars Tesla made, the wiser they became, and the better they were at assembling vehicles, specifically the Model 3. An example of Tesla’s progress is evident in the way Gigafactory 3 in China is designed.
The facility in China is built is like an evolved version of GA4 in Fremont, which changed the way Tesla assembled its cars. It should be noted that GA4 was built to figure out a way to refine Model 3 production after Elon Musk’s initial plans for a hyper-automated vehicle assembly line did not pan out.
Tesla executives learn a lot from GA4 and continue to improve the inner workings of their company. With that in mind, Korus predicted a 30 percent gross margin by the end of 2020 for the Model 3.
While Korus explained basic laws of progression in the auto industry, fellow ARK Invest analyst Tasha Keeney tackled the demand question bears keep asking. Is there really a demand for Tesla vehicles?
During an interview with Yahoo Finance, Keeney pointed out that Tesla raised the price for the Model 3 and concluded that the increase in ASP means there is a demand for the vehicles. She also mentioned Gigafactory 3 in China and how Tesla will be tapping into one of the world’s biggest auto markets.
Based on ZSW’s record of global EV registrations, China topped the list with over a million electric cars last year. For comparison, the US was second with a little over 300,000 EV registrations. That’s not even half of China’s numbers.
A Crumbling Short Thesis
When it comes to demand and Tesla’s sustainability, however, Galileo Russell—the CEO Hyper Change—seemed to have hit the nail on the head. In an interview with Yahoo Finance, Russell described Tesla’s demand as organic, which can be seen in the growing community of owners dedicated to the company’s mission.
Coincidentally, the same Tesla enthusiasts were described as “idealistic” in a seemingly negative tone by one of the reporters at the Yahoo Finance interview. Russell’s reply seems to sum up everything the bulls are feeling and thinking right now.
“I’m obviously biased, but I think the short thesis is obviously crumbling before our eyes. I mean a year ago or a year and a half ago, [bears said] ‘the Model 3 is ramping, look how much money they’re burning.’ And now nobody’s going to be talking about the cash flow because it’s so strong,” he said.
About the Author
Longtime writer and news/book editor. Writing about Tesla allows me to contribute something good to the world, while doing something I love.