Tesla Motors (NYSE:TSLA) announced another quarter of strong results but failed to enthuse investors. Shares of the company are down over 15% since the results were announced. Expectations were high from Tesla this time, so much so that even a minor blip would cause a major pullback in the share price.
We have a price estimate of $112 for Tesla, which is about 20% below the current market price. Tesla has had a fantastic year with shares of the company up more than 300% since the start of the year.
Total revenues for the quarter jumped eight and a half times (year-over-year) to $431.3 million, helped by higher unit sales. The net loss stood at $38.5 million or 32 cents a share. During the quarter, Tesla sold 5,500 Model S cars, including about 1,000 in Europe.
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Tesla had 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 $602.6 million. The net income was $15.9 million or about 12 cents a share.
Higher Expenses in Q4
For the fourth quarter, Tesla expects to sell another 6,000 vehicles which would take its full year tally to 21,500 units. Investors were generally expecting a more optimistic outlook. The company now has a production capacity of about 550 vehicles a week, up from about 400 units a week at the start of the year. 
In addition, Tesla expects the R&D expenses to swell 25% in the fourth quarter due to a higher spend on Model X product developments and the customization of Model S for international locations. Furthermore, selling, general & administrative expenses (SG&A) will also rise by 20% to absorb the costs related to retail store expansion, service centers and Superchargers.  All this dragged down the shares of the company.
Average Revenue Per Model (ARU) Rebounds
Tesla’s average revenuer per vehicle rebounded to ~$110,000, helped by the sale of the higher priced options in Europe. Tesla’s average selling price for Model S declined to ~$107,000 in the second quarter from about $115,000 in the first quarter. Our calculation for ARU includes the revenues derived from the sale of the regulatory credits. The reason why the figure was so high in the first quarter is because it includes revenues from the sale of ZEV (zero emission vehicle) credits to the tune of $60 million. 
With the revenues from the ZEV credits easing in the third quarter, the latest ARU is more reflective of the actual revenue earned per vehicle. Revenues from ZEV credits stood at $10 million in the latest quarter.
Aggressive International Plans
Earlier in the year, Tesla started selling its Model S car in Europe. In Norway alone, the automaker expects to sell 800 vehicles this year. Its next target market is Germany, where the automaker is installing the faster 135 kWh superchargers. Overall, by the fourth quarter of 2014, Tesla plans to have a supercharger within 200 miles of the majority of the population in mainland Europe.
The company has also started taking reservations for Model S in China and expects to deliver its first vehicle by the first quarter of 2014. With the help of expansion into newer territories, Tesla expects to sell vehicles at an annualized rate of 40,000 units by the fourth quarter of 2014.
Margin Expansion On Track
In the latest quarter, Tesla’s gross margins improved to 21% (excluding the benefit of ZEV credit sales) from 14% in the second quarter. It was really important for the automaker to expand its gross margins since the company has made a promise of achieving 25% gross margins by the fourth quarter.
The sale of ZEV credits declined to $10 million from $51 million in the second quarter, primarily due to sale of the Model S cars in non-ZEV credit states and in Europe.
Investors will be keenly eyeing the fourth quarter gross margin numbers. Till the third quarter, there was room for error since investors did not have an exact number in their minds. But any hits or misses in the fourth quarter number could have a large influence on the stock price. For the full year, we expect gross margins of about 21%.Notes: