Throughout 2017 and 2018, Tesla (NASDAQ: TSLA) posted phenomenal growth. Revenue soared from just $7 billion in 2016 to an estimated $21 billion in 2018. Vehicle deliveries grew at an even faster rate, rising from roughly 76,230 in 2016 to 245,240 last year. Tesla even turned profitable in the second half of 2018.

However, in the background, warning signs about the sustainability of Tesla's performance have been building up. Unfortunately, CEO Elon Musk is only now acknowledging the extent of the challenges the company faces, which has created an unnecessary crisis for the electric-vehicle pioneer.

Reality hits Tesla

Earlier this month, Musk sent a letter to Tesla employees announcing that the company had to cut about 7% of its full-time workforce. He noted that Tesla is on track to post a second straight quarterly profit for the fourth quarter, but that it will earn less money than in Q3. Furthermore, he expects Tesla's earnings to continue to trend lower in the first part of 2019.

View photos A Tesla Model 3 parked on a road, with a green field in the background More

Tesla posted a surprisingly strong profit in Q3 2018. Image source: Tesla.

The underlying problem is simple. As Musk stated in his letter (via CNBC), "While we have made great progress, our products are still too expensive for most people." He continued:

In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. ... [S]tarting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress toward lower priced variants of Model 3.

Today, the cheapest Tesla you can buy costs $44,000 before the impact of any tax credits. For the first year or so after Model 3 sales began, the cheapest available option cost $49,000. And many customers so far have opted for even pricier variants. The higher-priced models are dramatically more profitable for Tesla than a hypothetical $35,000 Model 3 would be.

As impressive as Tesla's Q3 surge to profitability was, it isn't necessarily sustainable unless the company can either dramatically reduce its manufacturing costs or permanently keep Model 3 average transaction prices above $50,000.

The signs have been there to see

In the past six months or so, it has become painfully obvious that Tesla is reaching the limits of demand for pricier Model 3 variants, at least in its main market of North America.

View photos A silver Tesla Model 3 and a red Tesla Model 3 in an empty parking lot. More

Story continues