Electric-car maker Tesla Motors' (TSLA +0.31%) high cash-burn rate and its pattern of quarterly GAAP losses are key concerns among investors who follow the company. If it persists over the long haul, the company will need to continue raising debt or equity to fund operations and growth. But there are a number of reasons Tesla's inability to report any meaningful profits could soon come to an end.
Model X. Image source: Tesla Motors.
A bullish bet
One financial company that is particularly bullish on Tesla's trajectory for EPS, going forward, is Credit Suisse. Analysts at the bank believe the electric-car maker will generate EPS of $4 in 2016. If Credit Suisse's estimates for Tesla's 2016 earnings play out, the company would drastically outperform the average analyst estimate for Tesla to report EPS of $1.86 in 2016.
A huge year for Tesla's new Model X SUV, which is only just now ramping up deliveries, will serve as a key driver for earnings growth during calendar 2016, according to Credit Suisse analysts.
Tesla has predicted during earnings calls that as the company ramps production of its SUV, costs will come down, and the company should eventually be able to achieve gross profit margins on the new vehicle similar to the ones on Model S.
Tesla's Model S currently boasts a gross profit margin of around 25%. Longer term, however, management wants to go even further with its vehicle gross profit margin.
"Our goal is to steadily improve gross margin and hopefully exceed 30% on the Model S and Model X vehicles within 18 months -- hopefully sooner than that," Tesla CEO Elon Musk said during the company's third-quarter earnings call. But this won't be easy, Musk warned: "[I]t does require quite an intense effort ... for every fractional point of gross margin."
Tesla's profitability will probably be almost entirely dependent on how many of its new SUVs it can deliver in 2016, as a successful rollout of the SUV to customers could increase vehicle deliveries by 50% or even more -- greatly increasing the chances of achieving profitability.
Tesla Fremont factory. Image source: Tesla Motors.
To help Tesla get closer to profits during 2016, management predicts capital expenditures during the year will actually be lower than in 2015.
If Tesla really can make meaningful progress toward its ambitious gross profit margin goal during 2016, and if the company reaches its production and combined delivery target for Model S and Model X of 1,600 to 1,800 vehicles per week, $4 in EPS during 2016 is attainable.
In addition to betting on earnings growth, Credit Suisse analysts believe the company will achieve its ambitious guidance for 17,000 to 19,000 vehicle deliveries in Q4. This many deliveries for the quarter would represent a year-over-year growth between 73% and 93%.
It begins with a rapid production ramp
Investors should look for evidence Tesla is ramping up production of its SUV as planned. During Tesla's third-quarter earnings call, Musk said the company was "very confident" it could begin producing Model X at a rate of several hundred vehicles per week in November and begin delivering several hundred per week in December. While achieving these levels of production and deliveries would constitute a small start, it would be enough to signal the beginning of a successful production ramp.
If Tesla can prove it is on a path toward a rapid production ramp, profitability in 2016 will seem more likely.
