Tesla To Turn Profitable This Quarter But Keep Expectations In Check

Tesla Motors (NYSE:TSLA) announced that it sold 4,750 Model S cars in the first quarter exceeding its own guidance of 4,500 cars that it forecast during the shareholders’ meeting in mid-February. Tesla also expects to be profitable in the first quarter, excluding cash payments related to non-cash options and warrants. Tesla’s shares surged more than 15% Monday to $44 on the announcement. ^[1]

Turning profitable is seen as a crucial milestone in the progress of a company still in its nascent stage. Tesla’s full-year losses had widened to $396 million last year from $254 million in 2011. ((TSLA 8-k))

Although the news is definitely positive, we think the sudden spike in the stock price could be an overreaction.

Markets Shouldn’t Be Surprised

By December 31, 2012,  Tesla had more than 15,000 reservations for the electric car while it was barely producing 400 units a week. Tesla had initially planned to churn out that many cars by the middle of 2012 but wasn’t able to achieve the target before the start of this year due to manufacturing hiccups. In fact, if there were any concerns regarding the Model S sales this quarter, they were more to do with supply than demand.

So, while this is certainly a positive development, there is no need to go crazy. It was only a matter of time before the company turned profitable depending on when it reached a sustainable production level to meet the real demand. Besides, when the company announced its fourth quarter 2012 results in February, it had said that it expected to be profitable in the first quarter of 2013. So while positive, the news shouldn’t really have caught the market by this much of a surprise.

The most important takeaway from this announcement is that Tesla is now successfully manufacturing close to 400 units a week. Even if you multiply 400 by 13 weeks in a quarter, it yields 5,200 cars. Tesla’s guidance of 4,500 cars was probably a bit conservative accounting for any potential production hiccups during the quarter. So, the fact that the company sold 4,750 Model S cars this quarter is reasonable and highlights that the production went on smoothly. Had the production been higher, the automaker would have sold more cars.

Tesla’s most important test will be if it can achieve the margins the management envisions. The company is very optimistic of achieving gross margins of 25% by the end of the year. The corresponding margins stood at 3.6% in 2012.

See full analysis for Tesla Motors

Mid-Term Concerns

Managing cash flows will be an uphill task after the company revealed last month that it intends to pay off the $465 million loan it took from the U.S. Energy Department by 2017, five years ahead of schedule. ^[2] Furthermore, the Palo Alto-based automaker will not begin manufacturing the crossover Model X from 2014, a year later than originally envisioned. ^[3]

Both of these factors are likely to keep the company cash-crunched for the next couple of years. Thus, in the wake of rising liquidity concerns, we’ll continue to remain cautious about the company’s valuation.

We currently have a Trefis price estimate of $40 for Tesla, which is about 10% below the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Tesla soars to all-time high after CEO says company is now profitable, April 1, 2013, mercurynews.com [↩]
2. Tesla repaying Obama admin loan 5 years early, March 12, 2013, msnbc.com [↩]
3. Tesla Model X Production Won’t Start Until Late 2014, March 12, 2013, nytimes.com [↩]