Tesla: Key Takeaways From Earnings

Tesla Motors ( TSLA ) announced record vehicle deliveries for the second quarter of fiscal 2015 on August 5, 2015. The Silicon Valley based auto maker delivered 11,532 Model S vehicles in the April-to-June period. In the first half of the year, the company delivered 21,577 vehicles, putting it on course for around 43,000 Model S deliveries for the full year. Tesla's revenue came in at roughly $955 million, an increase of around 1.6% quarter to quarter, but was up 24% year to year. Automotive revenue fell by $15 million to around $878 million, due to an increase of the 70D version of the Model S in the overall sales mix. The company offers two versions of the Tesla Model S: 70D and 85D. The latter comes with slightly superior features such as a higher range (270 miles vs 240 miles), higher top speed(155 mph vs 140 mph) and faster super charging. In our note below, we take a closer look at some of the highlights from the earnings report.

We have a price estimate of $170 for Tesla , which is about 37% below the current market price.

Improved Production Rate

Tesla is targeting a weekly production rate of around 2,000 units per week by the end of the year. In the second quarter, the company produced 12,807 vehicles, a 15% sequential increase and 46% year-on-year increase in production rate. In the third quarter, the company expects to produce just over 12,000 units, for the first time including Model X SUVs for the market. This figure would represent a 60% year-over-year increase but a sequential decrease.

There are two reasons behind this guidance: 1) Tesla just completed a planned shutdown of its factory in order to prepare its assembly line for the production of the Model X; and, 2) the company will be building out a lot of prototypes for testing the new vehicle before it goes out for sale. The auto maker sounded a note of caution around the second of these factors, suggesting that full-year deliveries might come in lower than the 55,000 target, as the company will prioritize customer experience over a higher top line. In this regard, Tesla is behaving more or less like a Silicon Valley company as opposed to a traditional auto company. The latter generally tend to focus on growth by targeting customers on the margin, often completely neglecting customer experience, while the former group is generally focused on improving the customer experience by making sure that power users get as much utility as possible out of the product. This kind of focus can hurt profits in the short run but ensures a high customer retention rate in the future.

Decline in Gross Margin

The company reported a gross margin of 23.9% on a non-GAAP basis and 22.9% on a GAAP basis. The non-GAAP figure was around 100 basis points lower than guided for by the company. The management cited higher manufacturing and part costs related to the ramp of their small drive unit line, as well as lower revenue collection due to the higher contribution of 70D vehicles in the sales mix. Contributing as well was the deferral of revenue recognition related to certain auto pilot features that are scheduled for release later in the year. We will have more to say on these details below.

Tesla's Unique Nature

Tesla's core value proposition is not just that it is maker of excellent vehicles, although it surely is. In fact, the Tesla Model S has won the Motor Trend Car of the Year and the Best Overall Car by Consumer Reports for two years in a row. Beyond this, however, is the fact that Tesla's business model is essentially an attempt to change the way people think of the experience of owning cars. The auto industry is supported by three pillars: 1) auto dealerships, with whom car companies partner in order to form relationships with local buyers and sell vehicles at best possible rates ; 2) gas stations, which offer service and provide fuel for running these vehicles and in turn supporting the whole transportation industry; 3) and, oil companies, which supply fuel to gas stations. Tesla's business model is a slow, drawn-out attempt to chip away at each of these pillars. Its ultimate intention is attain mass appeal as an alternative to conventional automobiles.

Here's how Tesla is specifically attacking each of those pillars: Tesla vehicles are made with a far fewer number of components than vehicles running on Internal Combustion Engines. The reduced complexity lowers the cost of owning a Tesla vehicle, providing an economic incentive to consumers to purchase their vehicles. Incentives and fuel savings can result in a $70,000 Model 70D costing only as much $50,000. But that's not all. The elimination of oil from the system means that these cars do not need oil servicing. This means that they do not require the support of dealerships which make profits from the after-sales servicing process. Moreover, the company is capable of sending software patches remotely for maintenance. Additionally, to keep dealerships chugging, auto companies plan annual release cycles of their vehicles. Tesla completely avoids this process and because of its ability to send software updates, can ship new features to already-sold vehicles. One example of this is the auto pilot features that will be delivered to the vehicles later this year.

Secondly, the company is building out a network of superchargers to support Tesla Model S owners. The current supply of Supercharging stations allows Model S owners to take free long distance road trips along specific routes. The company currently has 487 supercharging stations globally and is opening a new one at the pace of one every 24 hours. On average, drivers in California are never more than 42 miles away from a charging station and drivers in Germany 33 miles away. This is quite a bit farther than your average gas-powered car ranges from its nearest service station, we acknowledge. However, given the high range of Tesla's electric vehicles, the company has gone a long way towards alleviating any issues of range anxiety altogether.

Finally, In Q4, the company will release the Tesla Power Wall home battery storage option. This product will be available to both homeowners and businesses. Although the economics of the Power Wall do not quite work out for this to happen immediately, it is quite feasible that this product will allow users alternative energy to go off the carbon grid entirely at some future point, sustaining themselves with solar or wind powered energy, storage batteries and inverters. Though the technology is too young to cause such a massive shift in energy consumption habits just yet, it has the potential to achieve these targets one day, once these hurdles are overcome. Given sufficient adoption of solar power, along with further advances in the Power Wall and similar systems, such in-home power could well support the greater adoption of electric vehicles. Above all, however, they will need to be price competitive with current autos, rather than the luxury vehicles Tesla now offers.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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