Tesla Motors ( TSLA ) is scheduled to announce its Q1 earnings on May 7. Investors will be keenly watching the guidance and updates on business operations given out by the company during the earnings call. Elaborations on the Tesla Gigafactory project, specifically on financing, partnerships and the cost of construction of these factories and updates on whether the company has been successful in persuading the Chinese Government into considering Tesla for the green car subsidies, could have quite an impact on the stock.
We have a price estimate of $150 for Tesla , which is about 30% below the current market price.
Tesla has announced that it expects sales to grow from 22,500 in 2013 to 35,000 in 2014. To meet that target, the company has set itself ambitious production targets for the year, and issued guidance for 6400 deliveries on 7,400 cars produced. A key piece of information that investors will be watching is an update on assembly line efficiency. Tesla, which currently produces 600 cars a week, plans to raise its production to 1,000 cars a week by the end of the year. In the earnings call for Q4 fiscal 2013, CEO and chief product architect, Elon Musk, said that the a new assembly line which should help production numbers grow by the end of the year, was under construction. Interestingly, Musk also said that the company can increase production beyond the annual target if the demand is there. The company's sales in the past have been more reliant on supply and not on demand, since the demand here outpaces supply. Therefore, if the assembly line is completed ahead of schedule, it is possible that supply might catch up to demand for Tesla.
The automaker achieved its stated target of 25% gross margins in the fourth quarter of fiscal year 2013, excluding any benefits from the sale of ZEV credits. Tesla's gross margins improved from 17.1% in the first quarter of 2013 to 25.2% in the fourth quarter, helped by higher volumes and operational efficiency. What was surprising was that the company thinks there is room to further improve margins. Tesla is now targeting gross margins of 28% by Q4 2014. Company management cited economies of scale arising from increased production and increased efficiency in production as the reasons behind the revised expectation in gross margins. Thus, updates on the progress of the assembly line will be critical here, too. Auto companies, in their definition of cost of goods, usually include some fixed cost components like labor costs, plant operational expenses etc. Therefore, as volumes increase, the additional revenues often result in improved gross margins.
However, Tesla also cautioned that administrative and capital expenses will rise significantly as the automaker continues to expand into new markets and builds its Supercharger network. Superchargers are charging stations installed by Tesla for its customers to charge their car batteries for free. As of now, there are only 76 Superchargers in North America, but by the end of 2014, more than 80% of the population in the U.S. will be covered by the network. Similarly, the automaker will also build a pan-European network of chargers that aims to provide a charging point within 200 miles of every person. In addition, the Supercharger network of stations will also be built in China. Although the capital expense might increase in absolute terms, we estimate there will be a drastic reduction in operating and capital expenses, when expressed as a percentage of revenues.
In the long run, Tesla's gross margins could face a downward pressure. While achieving 28% gross margins for luxury cars may not be difficult, the real challenge for the automaker would be to sustain the figure when it introduces the Gen III within the next 2-3 years. Due to its lower price (expected price ~$35,000-40,000), the model should see higher volumes than the Model S. Since luxury cars generally have higher margins than mid-price cars, and thus a greater proportion of Gen III sales could erode some of the profitability. Mainstream automakers such as GM or Ford have gross margins in the range of 18-20% compared to ~25% margins for a luxury automaker such as Daimler.
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