Tesla was unprofitable for years, but now it’s poised to become a powerhouse

Tesla’s gross profit margin was 20%, compared with 17% at Toyota and Volkswagen, and less than 10% at General Motors, Ford and Fiat Chrysler. The company has maintained a profit margin of 18.8% or better for the last three quarters.

Perhaps most importantly, there now are reasons to believe Tesla’s profit guidance.

“EVs are not just profitable,” wrote Morgan Stanley auto analyst Adam Jonas in a recent note. “When they’re made at scale with the right cost structure they can be extremely profitable.”

Making electric automobiles rather than cars with the more complex internal combustion engines, with nonunion labor to boot, is a pretty good competitive edge. And electric cars have far fewer moving parts than cars with traditional internal combustion engines.

Auto industry experts say building an electric car requires nearly one-third fewer worker hours than building a traditional gas-powered car.

Shares have risen 87% so far this year, despite the effects of the Covid-19 pandemic on production and sales, and despite falling from record highs for the stock in early February before the overall markets turned bearish.

“Proving that EVs are more profitable than [internal combustion engines] helps surmount a major impediment to investment in the tech and broader adoption… as well as recognition by investors that moving to EVs doesn’t have to come at the sacrifice of profitability,” Jonas said in his note.

Why it lost money in the past

As car buyers shift their purchases to SUVs from sedans, the Model Y is expected become by far the company’s best-selling car. If its sales forecasts prove accurate, it would be the best-selling SUV of any kind in the United States — gas or electric — passing established models like the Toyota Rav 4.

Challenges in the near term

And it’s not clear how much safety measures being put in place – such as limits on the worker interactions, barriers between workers and limits on the number of people in different areas of the plant at one time – will affect productivity at the plants.

Then there’s the question of sales demand.

Even so, Tesla said it ended the first quarter with the biggest-ever backlog in orders for its cars. It also had nearly 20,000 completed cars on hand at the end of the first quarter that it was unable to deliver amid the shutdown. Those sales could show up in the second quarter with virtually no additional cost to Tesla.

Musk doesn’t plan to stop there. Within five years, he said, there will be “several” more plants beyond the two it operates today, potentially expanding Tesla’s profit margins even further.

Investors are starting to realize that, too.