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Tesla bull explains why the profitable trend is 'long-term sustainable'

Tesla (TSLA) bulls had a good day Wednesday.

The electric carmaker hit it out of the park in its latest quarterly results, posting its third-ever profit in its eight years as a public company. Thursday saw the stock shoot up more than 9%.

And while some analysts still question whether the historically cash-chomping company will manage to deliver repeat performances, others are convinced the upbeat report marks the start of a trend of sustained profitability.

‘We think this is long-term sustainable’

“It’s surprising to us — a lot of people are saying this is a one-time peak of earnings because the average selling price of the cars was so high,” ARK Invest analyst Sam Korus told Yahoo Finance’s Midday Movers on Thursday. “What that fails to understand is that electric vehicles are declining in the cost to produce. …

“Not only are battery costs coming down, but Tesla is becoming more efficient at actually producing cars and making sure that their machines are running,” Korus added. “So we think this is long-term sustainable.”

Prices for Tesla’s signature Model 3 vehicle started at $49,000 in the third quarter, with the Model S and X cars starting at even higher price points. The company’s goal is to eventually bring Model 3 prices down to $35,000. However, CEO Elon Musk acknowledged during a call with investors Thursday that there is “more work to do before we can make a $35,000 car and have it be part of the gross margin” with an overall Cost of Goods Sold (COGS) of less than $30,000.

An employee cleans the logo of a Tesla Model 3 automobile during the first press day of the Paris Motor Show at the Parc des Expositions at the Porte de Versailles on October 2, 2018 in Paris. (Photo by Chesnot/Getty Images)

Model 3 gross margins on a GAAP basis were more than 20% for the quarter, exceeding the company’s own expectations of 15%. Tesla CFO Deepak Ahuja attributed this to lower manufacturing costs, improved manufacturing labor hours, and better fixed-cost absorption on account of higher production. The company produced 80,142 vehicles in the third quarter — 50% more than its previous all-time high in the second quarter — including more than 53,000 Model 3 vehicles.

“We are going through this phase where we are now stabilizing production, and the team can now intensely focus on cost optimization,” Ahuja said during the investor call. “And that trend will just continue in Q4.”

Musk said he anticipates the company will be cash-flow positive for all quarters going forward, aside from quarters where a significant repayment is due. The executive said earlier this year that Tesla would begin to be profitable starting in the second half of 2018.

A Tesla Model 3 automobile is on display during the first press day of the Paris Motor Show at the Parc des Expositions at the Porte de Versailles on October 2, 2018 in Paris. (Photo by Chesnot/Getty Images)

‘Profitability at last, just don’t get used to it’

Some analysts have boosted their outlooks Tesla’s stock following Wednesday’s results. Analysts at Wolfe Research upgraded the stock to outperform from peer perform. Morgan Stanley increased estimates for fourth-quarter free cash flow to $544 million from $159 million, while maintaining a $291 price target and equal-weight rating.

Others, however, are approaching the company’s promises of profitability with caution. In a note published on Thursday, UBS analyst Colin Langain wrote that Tesla posted “profitability at last, just don’t get used to it.”

“While TSLA claims it will be profitable and cash-flow positive going forward, we do not see that as likely with declining prices,” Langan wrote. “TSLA also claims to have no plans for a capital raise; however our view on a Q4 or 2019 capital raise is unchanged as Tesla will need to invest to expand Fremont production, build a China factory, ramp Model Y, and expand infrastructure.”

Musk has had quite the year. Here is he on September 17, 2018 (Photo by DAVID MCNEW / AFP / Getty Images)

Musk said Wednesday that Tesla’s “current operating plan is to pay off our debts and not to refinance them…and reduce the debt load and overall leverage of the company.” The executive has continuously shot down analysts’ predictions that the company would need to raise billions of dollars in new capital. Tesla reported that it had about $3 billion in cash at the end of the third quarter and burnt through about $1.8 billion in cash in the first half of 2018.

Even if Musk does deliver on his cash-flow positive promises, an additional debt or equity raise wouldn’t be the worst thing for the company given its ambitious plans for overseas production, Korus said. Tesla announced plans to move part of its production to China in 2019, where it intends to produce 250,000 Model 3s and Model Ys annually.

“We would actually be very excited if they did raise capital to invest further, especially with this plant just starting up in China,” Korus said. “If they could accelerate that by raising capital, we’d just be more than happy for them to do that.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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