Tesla Delivers Strong Results Yet Again

Helped by higher sales of Model S and a continual improvement in its operations, Tesla Motors (NYSE:TSLA) announced a strong set of numbers that cheered investors yet again. Shares of the company were up 15% post the earnings release. Tesla is one of the most closely followed companies and shares of the automaker have quadrupled since the start of the year.

Total revenues for the quarter jumped almost twenty times to $401.5 million while the net loss stood at $30.5 million. Higher production levels helped the automaker deliver 5,150 cars, exceeding its own estimate of 4,500 cars. Tesla remains on track to sell 21,000 Model S cars in 2013.

Tesla introduced a new lease program earlier in the year. GAAP requires Tesla to spread out the revenues of the cars sold through this program over the lease tenure (i.e. treating these revenues as deferred revenues). Therefore, a better method to gauge the automaker’s performance is to analyze the non-GAAP figures. On a non-GAAP basis, Tesla’s revenues were $552 million. The net income was $26 million or about 20 cents a share.

Gross margins improved to 22% (non-GAAP); however this includes the positive impact of the sale of ZEV (zero emission vehicle) credits. Excluding the effect of ZEV credits, the gross margin would have been 14%. Tesla has a goal of achieving gross margins of 25% by the year end, excluding any contribution from the sale of credits.

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Beyond North America

Tesla also began its European deliveries of the Model S. The automaker is targeting Norway, Switzerland and Netherlands initially. Not only do these countries boast of some of the highest per capita incomes in the world but the general public is also highly passionate about environmental protection. The governments also provide incentives such as no road tax, reduced VAT, access to bus lanes, free parking etc. As a result, Tesla is likely to receive an enthusiastic response in these nations.

In Norway alone, the automaker expects to sell 800 vehicles this year. Tesla will also open its first store in China this year. Based on the initial demand, the automaker is confident of selling at an annualized pace of 40,000 cars by late 2014.

Tesla’s average selling price for Model S reduced to ~$107,000 from about $115,000 in the first quarter. The reduction was primarily due to selling a higher proportion of the lower priced 60 kwh battery and lower revenues from the sale of credits. However, the automaker expects the figure to rebound in the third quarter, helped by the sale of European Signature Series cars. For the full year, we expect an average selling price of about $113,000.

Our Take

The latest quarterly results highlight the popularity that Tesla enjoys. These are a strong set of numbers, no doubt. However, the shares of the company continue to soar even though the automaker is pretty much meeting its own guidance. Gross margins, even though they improved, are still only 14% (after excluding the effect of ZEV credits). The sale of credits amounted to $51 million in the second quarter. Remember, the company is targeting gross margins of 25% by the year end, without any benefit from the sale of credits. Thus, a lot of work still needs to be done in this department.

Tesla did sell 650 more cars than its initial estimate, but that is primarily because of an increased production level. The automaker was able to raise the production level in the second quarter by 25% to about 500 cars a week. There was a backlog of orders at the start of the year and any surge in production would have resulted in enhanced sales. Although Tesla should be lauded for its ability to raise the production levels at a brisk pace, it is important to not get carried away by the mood of the market and undermine the fundamentals of the company.

After the second quarter earnings, we have revised our price estimate for Tesla to $84 per share

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