Electric-car company Tesla (TSLA -1.39%) has seen impressive growth in vehicle sales recently. Trailing-12-month deliveries are up 88%, fueled by surging production and deliveries of its lower-cost Model 3. But questions remain about how viable the company's business is as the automaker scales. While its losses have been narrowing and its free cash flow has turned positive, there's still uncertainty about whether this momentum can continue.

Questions linger: With Tesla's growth driven entirely by its lowest-priced vehicle, could the automaker's gross profit margin contract and weigh on profitability? Will spending on more production capacity and new vehicle development hurt free cash flow?

The company's third quarter will provide a timely window into whether or not Tesla's business is showing signs of scalability. When the automaker reports its third-quarter results on Oct. 23, here are two key areas investors will want to look at in order to assess Tesla's business.

A red Tesla Model 3.

Tesla's Model 3. Image source: Tesla.

Automotive gross margin

One of the key bull cases for Tesla stock is that the company will eventually be able to flex its premium brand and consistently command a 25% gross profit margin on its automotive business. Indeed, the company has said it is targeting a non-GAAP (adjusted) gross profit margin of 25% for combined sales of its Model S, Model X, and Model 3. This target is impressive because it's about the same gross profit margin that Tesla had on its higher-priced Model S and X sales before Model 3 production and deliveries ramped up. Achieving and sustaining this target even as Model 3 deliveries grow to account for a larger portion of total sales, therefore, would imply that Model 3 production is seeing improved efficiency.

Unfortunately, this key metric has been moving in the wrong direction recently, suggesting Tesla is having trouble achieving the economies of scale it believed it could. After its automotive gross margin peaked in the third quarter of 2018 at 25.8%, it decreased to 24.3% in Q4, 20.2% in Q1,  and 18.9% in Q2. This means that Tesla's gross margin is moving in the wrong direction as Model 3 deliveries increase.

For this reason, investors should tune in closely to this metric when the automaker reports its third-quarter results. Tesla already announced it delivered a record 97,000 vehicles during the quarter, with nearly 80,000 of these vehicles being Model 3 -- more than any other quarter. Were these increased Model 3 deliveries during the period enough for economies of scale to start materializing, or did the company's automotive gross margin contract once again?

Net income

If Tesla's automotive gross profit margin moves in the wrong direction, the automaker may have trouble meeting its guidance. At the time of the company's second-quarter update, management guided to be profitable in Q3. But the Street seems to have doubts about this target. On average, analysts expect Tesla to report a non-GAAP loss per share of $0.42 in Q3.

If Model 3 gross margin did hit a tipping point of improved efficiency during the quarter, Tesla could surprise investors and report a profit. But given the company's history of losses, there are no guarantees.