Tesla Earnings Preview: Q4 Margins And Guidance Under Spotlight

by Trefis Team
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Tesla Motors (NYSE:TSLA) is scheduled to announce its Q4 and full-year earnings on February 19. Investors will be keenly watching the guidance given out by the company during the earnings call. During the previous earnings release, Tesla failed to live up to the expectations of the investors and the stock declined 30%. However, in the last three months, the stock has once again consolidated and is trading near its all-time high of $202. At these price levels, Tesla is valued close to $25 billion. For a company that still burns cash on a GAAP basis, such valuations could imply irrational exuberance.

We have a price estimate of $113 for Tesla, which is about 40% below the current market price.

Unit Sales Figures Impress

Tesla has already announced the full year sales figures. During the quarter, the automaker sold 6,900 Model S cars to take the full year tally to 22,400. [1] The fourth quarter sales were about 15% more than the company’s guidance given out at the end of the third quarter. However, as it has happened in the past, the company’s sales are more reliant on supply, and not on demand, since the demand here outpaces supply. By the end of the third quarter, the company’s production had risen to 550 units a week, up from 400 units a week at the start of 2013.

Sales in the fourth quarter were also helped by the introduction of the Model S in European markets such as Germany, Norway, Netherlands, France and Denmark. The official figure isn’t out but estimates suggest that the automaker could have sold about 3,500 cars across the Atlantic. [2] Overall, Tesla has ambitious plans for Europe. By the end of 2014, Tesla plans to build a pan-European network of chargers. There will be at least one Supercharger within 200 miles of every person in Europe. Superchargers are charging points installed by Tesla that allow the company’s customers to charge their car batteries for free. Germany will be one of the biggest markets and annual sales there could even touch 10,000 units by 2015. [3]

See full analysis for Tesla Motors

In China, Tesla unveiled the pricing of its Model S cars recently- similar to what it is in the U.S. However, due to additional expenses such as import duty and VAT, the final price of the car will be higher. [4] Even when taxes, import fees and surcharges are discounted, luxury automakers often charge much higher for the same cars in China, compared to what they charge back home. Tesla has already started taking reservations for the vehicle and deliveries will begin in March. With expansion into new territories, Tesla hopes to sell Model S cars at an annualized pace of 40,000 units a year by the end of 2014.

Tesla is also expected to debut the Model X – a luxury SUV that will be priced similar to the Model S, by the end of 2014. However, the company will initially have a very limited production. In 2015, the automaker expects to increase the production of Model X significantly. Investors will be eagerly anticipating any sales guidance for the upcoming model.

Magnitude Of Margin Improvement Will Be Scrutinized

Tesla’s management has repeatedly insisted that gross margins will touch 25% (excluding the benefit of ZEV sales) by the fourth quarter of 2013. During the third quarter, margins had improved to 21%, from 14% in the second quarter. If Tesla fails to achieve its aforementioned goal of 25% gross margins, there could be a significant movement in the stock price.

Tesla also 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. In addition, the selling, general & administrative expenses (SG&A) are also expected to rise by 20% in order to absorb the costs related to retail store expansion, service centers and superchargers.

In the long run, Tesla’s gross margins could face a downward pressure. While achieving 25% gross margins for luxury cars may not be difficult, the real challenge for the automaker would be to sustain the figure when it introduces the Gen III within the next 2-3 years. Due to its lower price (expected price ~$35,000-40,000), the model should see higher volumes than the Model S. Since luxury cars generally have higher margins than mid-price cars, a greater proportion of Gen III sales could erode some of the profitability. For example, mainstream automakers such as GM or Ford have gross margins in the range of 18-20% compared to ~25% margins for a luxury automaker such as Daimler.

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Notes:
  1. Tesla Motors Forums, teslamotors.com []
  2. Global Sales Of Tesla Model S May Have Surpassed 25,000, cleantechnica.com []
  3. Tesla eyes annual sales of 10,000 cars in Germany: CEO in paper, October 26, 2013, reuters.com []
  4. teslamotors.com []
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