Tesla targets VW, BMW as Model 3 heads for Europe

October 25, 2018 09:54 CET

NEW YORK — Tesla says its Model 3 will go on sale in Europe early next year, and CEO Elon Musk is picking some of the continent’s top cars as targets for the sedan.

Musk announced the start of European sales for the car on Wednesday as Tesla reported a surprise profit.

Musk estimated that sales of the Model 3 would be in the range of 500,000 to 1 million a year. The CEO said the Model 3 measures up well against BMW’s 3 series, which sells roughly at the low end of that volume annually. Volkswagen Group’s Golf by comparison sells at the higher side of that range, he said.

Tesla announced just its third quarter of positive earnings in its history on Wednesday, bolstering Musk’s bid to make selling electric cars a financially sustainable business.

Tesla is still far from being a full-line automaker, and it’s followed up past quarters of profitability with strings of more losses. It’s still nowhere close to generating revenue and earnings to contend with companies such as Toyota or BMW. But even investors who have been among the most vocally bearish about the company have started to change their view as Musk lures away buyers of Camry and 3-series sedans.

“It is the most encouraging sign of sustainable profitability that we’ve seen in three years,” said Gene Munster, a managing partner at venture capital firm Loup Ventures. “Tesla did all of this despite the distractions around Elon himself, and the positive report reverses some of the damage that’s been done.”

Tesla reported adjusted net income of $2.90 a share, soundly beating analysts’ average estimate for a small loss. Free cash flow was about $881 million, a turnabout from the billions of dollars Tesla was burning on a quarterly basis while it was struggling to ramp up the Model 3.

And even as deliveries took off, Tesla managed to maintain more than $900 million in customer deposits, showing that there is still plenty of pent-up demand for the company’s cars.

Musk capped the quarterly report with a drama-free earnings call, which is far from a given for him. He opened by calling on executives responsible for efforts ranging from artificial intelligence and Autopilot to workplace safety, leaving less time than usual for the question-and-answer session with analysts.

The quarter “marks an inflection point,” said Joe Dennison, associate portfolio manager of Zevenbergen Capital Investments in Seattle. Strong demand for pricier all-wheel-drive and high-performance versions of the Model 3, plus Tesla’s plan to start selling the car in Europe early next year, should support profit margins, he wrote in an email.

Tesla reaffirmed its forecast for profit and positive free cash flow in the fourth quarter, adding credibility to Musk’s prediction a quarter ago that the company will make those feats routine going forward.

The CEO couched those comments in August by saying that “force majeure” events could prove him wrong. One such circumstance the company will have to muddle through in the coming quarters will be trade tensions involving China.

Higher tariffs have hit demand for Model S sedans and Model X crossovers imported into the country. Parts that Tesla sources from China and uses to build all of its vehicles in California are also being hit with higher levies, which will be a $50 million blow to gross profit in the fourth quarter.

Tesla’s CEO remains confident regardless. “Our earnings profile has flipped dramatically,” Musk and Chief Financial Officer Deepak Ahuja said in a letter to shareholders. “We can’t thank you enough for your support. We would not have achieved this historic quarter without it.”

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