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Tesla beats the market and its share price surges

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Tesla continues to burn through cash at a bonfire rate, and doubts remain that CEO Elon Musk can deliver his new mainstream electric Model 3 at the pace he is promising. But Tesla's share price shot up by 3.8% in after-hours trading when it announced sharply higher-than-expected quarterly earnings, and Musk delivered a decidedly ebullient assessment of the company's prospects.

"This is the best I've ever felt about Tesla," Musk told Wall Street analysts in a second-quarter earnings call.

The $35,000 Model 3 is important both to Tesla and the market. If it succeeds in capturing large, year-after-year sales, Musk's big bet on creating a new carmaker will be a stunning success; conversely, if sales are only middling or peter out, Tesla will probably fail — there does not appear to be a Plan B. As to the market, the Model 3 has driven almost every major carmaker on the planet to plan their own electrics.

One thing raising Musk's spirits is the public reception for the Model 3. He said a telling measure is what journalists said after going for a spin at its July 28 coming-out ceremony: "Eighty percent of the journalists said they would buy the cars themselves. The other 20% said 'maybe.' This is crazy. I've never seen anything like it."

Tony Seba, a professor at Stanford University, told Axios that Musk has already succeeded with the Model 3. "This is the car that proves it can be done," Seba said. "Essentially, everybody else will have to chase him. That will produce better and cheaper electric cars."

The main numbers:

  • Tesla lost $1.33 a share in the quarter, far less than the $1.88 consensus expectation. According to Barclays' Brian Johnson, the beat was driven largely by $100 million in zero-emission-vehicle credits from California. But even without those 50 to 60 cents a share, Tesla's results would have met the consensus expectations.
  • The company has 455,000 net orders of the Model 3, less than the 500,000 he had estimated on July 28. He said the difference is cancellations.
  • Musk said reservations for the Model 3 have accelerated in the half-week since the launch, with 1,800 Model 3s being ordered every day. Orders also have accelerated for the upscale Model S and the Model X SUV.

Musk also said:

  • The company spent $959 million in the second quarter, largely on building the giant battery Gigafactory and tripling the number of superchargers in the U.S. network. Spending in the second half of the year will be about $2 billion.
  • Tesla ended the quarter with $3 billion in cash on hand.
  • Musk isn't currently considering selling more stock to build up more cash, but is thinking of selling bonds.

One thing making the Model 3 easier to manufacture than Tesla's prior models is the variety of options offered to customers: The different possible permutations of the Model 3 are 100, versus 1500 for the Model 3, which "significantly reduces manufacturing complexity and streamlines the purchasing process for our customers," Tesla said in an earnings statement. "This densification sets the stage for us to produce over 500,000 Model 3 vehicles annually."

In a note to clients, Barclays' Johnson — a Tesla skeptic — was not convinced: "We don't put much stock in the 1,800 daily order rate. We'd prefer to see how the aggregate order book builds, and what the sales conversion is. ... It sure looks like a nice outlook post the self-described 'production hell'. But with a wide set of parts required to meet the ramp, is it achievable?"

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