Tesla reports Q2 profit and picks Texas for new $1B gigafactory

Tesla reported a surprise second-quarter profit as it confirmed ambitious targets for 2020 car deliveries despite the coronavirus pandemic and announced plans for a new auto factory in Texas.

The result clears the way for the highflying company led by Elon Musk to potentially join the S&P 500. A requirement for the prestigious Wall Street index is four successive profitable quarters, which Tesla has now achieved.

Tesla shares, which have exploded in 2020 as the company has met key targets, climbed further following the results. Several analysts that have praised Tesla's accomplishments view the rise in valuation as excessive.

Musk praised Tesla's staff for "exceptional execution" during a period that included the weeks-long closure of its California plant due to the coronavirus pandemic and said he looked forward to "continue scaling" Tesla up to enable production levels closer to that of conventional auto giants.

"I've never been more optimistic or excited about the future of Tesla," Musk said on a conference call with analysts and investors.

Musk, who has long flouted the unwritten rules of button-down CEOs, avoided the sort of fights with analysts that have occasionally surfaced on conference calls.

But he maintained an informal air throughout the 60-minute session, saying he was interested in hiring "revolutionary actuaries" for an insurance project being developed and effusing about a new factory as an "ecological paradise."

Soaring valuation

The electric car maker scored profits of $104 million in the quarter ending June 30 compared with a loss of $408 million in the year-ago period.

Revenues fell five percent to $6 billion.

Tesla said it was on track to ramp up production at factories in California and Shanghai and that activity on a plant being built in Germany "continues to progress."

The company said delivering 500,000 autos this year "remains our target," effectively reinstating its forecast after withdrawing the figure this spring amid the peak of US coronavirus shutdowns.

A note from Wedbush Securities said China appeared to be the "star of the show," based on industry data and that demand in the country is "a ray of shining light in a dark global macro" environment.

"This sustained level of profitability is the key for the bulls and speaks to a business model which is staying out of the red ink despite this unprecedented Covid-19 dark storm," Wedbush said.

New Factory

Musk said the company had picked a 2,000-acre site near Austin, Texas for its next "Gigafactory" to build a number of models, including the new "Cybertruck" vehicle.

The new factory will build Tesla’s upcoming Cybertruck pickup and will be a second US manufacturing site for the Model Y small SUV, largely for distribution to the East Coast.

Tesla will build on a 85-hectacre site in Travis County near Austin and will get more than $60 million in tax breaks from the county and a local school district over the next decade. State incentives also are possible for the plant, which will be over 4 million square feet.

The company has pledged to invest $1.1 billion and said it will pay a minimum wage of $15 per hour to employees and provide health insurance, paid leave and other benefits.

The area that’s home to the University of Texas at Austin and tech companies such as Dell Inc. was a candidate for the plant all along, but Tulsa, Oklahoma, emerged in mid-May as another possibility.

Tesla doesn’t have a lot of time to get the factory running if it wants to meet target production dates. The company says on its website that the Cybertruck will be available starting late next year. 

The announcement was greeted by Texas Governor Greg Abbott, who hailed Tesla as "one of the most exciting and innovative companies in the world" and said the factory would add "at least" 5,000 new jobs.

Tesla has often missed promised production dates in the past.

Musk has reportedly been happy with Texas, where his SpaceX rocket company has operations in Brownsville and in McGregor north of Austin.

The new factory will be Tesla’s biggest so far, although it may not employ as many workers as the 10,000 at its factory in Fremont, California. The electric car maker has said it wants the new factory to be in the center of the country and closer to eastern markets.

The Fremont factory currently is Tesla's only US assembly plant. It has a second US factory in Reno, Nevada, where it builds batteries for its vehicles and employs about 6,500 people. Tesla also has a factory in Shanghai and another one under construction in Germany.

Musk has been unhappy with California, where earlier this year he flouted local orders to stay closed to help stem the spread of the novel coronavirus. Musk has threatened to move the company’s headquarters out of Palo Alto and all future vehicles out of the plant in Fremont, a reworked factory that once was run jointly by Toyota and General Motors.

The Austin area’s chamber of commerce says that Texas has no corporate or individual income taxes. 

It also touts the region’s young workforce as one of the most educated in the country. Nearly 47% of adults have at least a bachelor’s degree, pushing Austin into the top 10 among large metro areas, the site says. But at present, Tesla can’t legally sell its vehicles in Texas. A state law requires cars to be sold through franchised dealers, not company stores like Tesla operates.

Tulsa put up a good fight, but may have been used to win better terms from Texas. Oklahoma boasts about its low tax rates and cost of living, particularly low utility costs. 

Musk even visited the Tulsa site earlier this month.

Oklahoma hasn’t had an auto manufacturer in the state since General Motors shuttered its Oklahoma City facility in 2005, but Tulsa is home to an American Airlines maintenance facility that employs about 5,200 workers.