Tesla Motors (NASDAQ:TSLA) has garnered a lot of attention lately. Shares of the Silicon Valley based automaker have jumped close to 100% in the last month and more than 50% since it released its earnings a couple of weeks ago. The automaker turned profitable for the time in the first quarter, which shows how far the company has come. 
Keeping in mind the latest developments, we have raised our price estimate for Tesla to $69. On the other hand, it is still about 20% below the market price. One should exercise cautious optimism following the rally in the company’s shares. It is important to look at the company’s fundamentals to gauge the kind of premium levels that are justified and reasonable.
We are cautious on the stock due to the following factors:
- How Much Of Tesla’s Overall Revenue Is Unrecognized Due To Accounting Principles?
- How Much Do Tesla’s GAAP and Non GAAP Margins Differ?
- How Much Revenue Does Tesla Make Per Each Unit Vehicle Sold?
- How Has Tesla’s Gross Margin Behaved Over The Last Three Years?
- How Much Does Tesla Spend On Research and Development?
- How Much Does Tesla Spend On Selling, General and Administrative Expenses Per Unit Sold?
1) Revenue Per Vehicle Unsustainable
In the first quarter, the automaker recorded an average revenue per vehicle of close to $115,000. Most of the cars that were delivered were the premium 85 kwh battery pack model whose price starts from $95,000 (before the Federal government rebate). However, the reason why there is a $20,000 gap is because automotive revenues also include revenues earned from the sale of regulatory credits (mostly Zero Emission Vehicle or ZEV credits) to the tune of $85 million in the first quarter. 
The sale of credits was unusually high during the quarter and Tesla’s management has acknowledged it will decline in the following quarters. Moreover, a greater proportion of the sales will comprise of the lower priced 60 kwh model. Until now, most of the Model S that have been delivered are the 85 kwh ones, which have a higher price tag. Thus, going forward, the average revenue recorded per model sold will be definitely lower.
The reason why Tesla was able to sell so many units of the higher priced 85 kwh model was because of the pent up demand from the order backlog. It might not be reflective of the real demand. In short, the first quarter results, although strong, can be a bit misleading if extended for the remainder of the year.
2) Margin Forecast A Challenge
Tesla’s gross margins in the first quarter rose to 17%, a huge improvement from the corresponding figure of 8% in the fourth quarter of 2012. However, these figures include profits earned from the sale of ZEV credits. Excluding the credits, Tesla’s margins were a mere 5-6%. 
The company on its part has clearly stated that it intends to hit margins of 25% by the end of the year, excluding the effect of ZEV credits. But there is a still a long way to go from here and reaching the targeted range could be difficult. Moreover, growing margins from this point onward will be a challenge as the automaker is already producing close to its full capacity.
Throughout the fourth quarter of 2012, Tesla was unable to hit its peak production of 400 units a week. Certain costs remained fixed while the top line was limited due to production constraints, which is why margins were so weak. Now that Tesla’s plant is already churning out 400 cars a week, widening the margins in the subsequent quarters will definitely get tougher.
3) Profits Are Still Very Small
While Tesla’s earnings beat expectations, the net income of $11.2 million is still very small on an absolute basis. Had there been a slight production hiccup resulting in 50 or 100 fewer sales (which shouldn’t really affect the long-term fundamentals of the company), Tesla’s income could have dropped substantially. And we certainly would not have seen the magnitude of the recent jump in share prices. The underlying takeaway is that it’s still early days for the company, and the market might be giving too much credit for its ability to continue to ramp up production and sell cars.Notes: