Earnings Preview: How Many Vehicles Can Tesla Deliver This Quarter?

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Tesla Motors (NYSE:TSLA) is scheduled to announce its Q1 earnings on May 6. Investors will be keenly watching the guidance and updates on business operations given out by the company during the earnings call. In 2014, the automaker was  expected to sell 35,000 Model S cars, helped by higher production rates and expansion into new markets. However, the company fell short of that target selling something just short of 32,000 units. The auto maker attributed the miss to a misreading of demand from China and some delays in the production process. Following Q4 earnings, the company issued a target of 55,000 deliveries for 2015, which would require it to up its delivery rate by 70% for each quarter compared to last year. Even though the company has been working on making its assembly line efficient enough to be able to improve the production rate to 2,000 vehicles per week by the end of the year, that is a tough ask. [1]

To meet its 2015 targets, Tesla will have to increase its delivery rate by about 70% for each quarter compared to the rate last year. The planned introduction of the Model X by the middle of 2015 should help the company in attaining that target, but a lot of it will rely on how quickly it is able to reach the production rate target of 2,000 vehicles per week.  By our estimates, just about 1,400 of the cars produced in the fourth quarter were only delivered in the first quarter of fiscal 2015, which meant that the lag time between production and delivery came down considerably for the fourth quarter, as just under 80% of the cars produced in the quarter were delivered. The company said that it expects the quarterly gap between vehicles produced and vehicles delivered to decline in the future quarters. This is important as some customers, especially in China, have expressed disappointment at the time lag between time of order and time of delivery.  [2]

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We have a price estimate of $170 for Tesla, which is about 25% below the current market price.

See Our Complete Analysis For Tesla Motors Here

Margin Expansion

Tesla’s gross margins improved from 17.1% in the first quarter of 2013 to 25.2% in the fourth quarter, helped by higher volumes and operational efficiency. What was surprising was that the company thought that there was room to further improve margins. Tesla targeted gross margins of 27% by Q4 2014. [3] The company achieved that target with its gross margins improving to 27.4% on a GAAP basis on account of higher revenues from the sale of ZEV credits. On a non-GAAP basis, gross margin stood at 26.7%. [4] Tesla’s gross margins have improved from 17.1% in the first quarter of 2013 to 27.4% in the fourth quarter of 2014, helped by higher volumes and operational efficiencies. Tesla is targeting gross margins of 26% in 2015. [5] Auto companies, in their definition of cost of goods, usually include some fixed cost components like labor costs, plant operational expenses, etc. Therefore, as volumes increase, the additional revenues often result in improved gross margins.

In the long run, Tesla’s gross margins could face a downward pressure. While achieving 27% 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, and thus a greater proportion of Gen III sales could erode some of the profitability. 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.

However, there are other factors which might help the company overcome those downward pressures, chief among which is the Giga factory. If you think about the supply chain involved in the manufacturing and distribution process of a battery, you will see some element being mined in South America and then shipped to North America for refining and processing and then shipped to Japan or South Korea for further refining and processing and then back to North America where it will be put in a car that will be sold in Europe. This is a horribly inefficient process. Tesla’s big move is to bring all these different parts under the same roof. This move alone will save the company a lot of money. Besides savings in labor costs, increased demand will reduce the battery’s price — the adding up of a number of single digit percentages which might bring down the cost of producing and selling a battery by as much as 30%. Given that 25% of the cost of making a car is battery costs, this can result in improved margins.

Powerwall

Late last month, Tesla announced a new product line called Powerwall, which is a lithium ion battery that allows consumers to store energy for later use. [6] The batter costs $3,500 for 10 kilowatt hours of storage and $3,000 for 7 kilowatt hours of storage. We will be looking carefully for what Tesla hopes to achieve from this foray into the energy storage segment. Even though these batteries have brought down the cost of storing energy to an amount much lower than people suspected, their economics are still only useful for people and places where the cost of power outage is very high. Therefore, this technology will only find early adopters from enterprises and consumers for whom the cost of a power outage is extremely high. These might include movie theaters, utility companies and markets such as Australia and Hawaii. However, if the company can bring down the cost of the battery in the future, a number of different uses can open up thereby rapidly expanding the market for this product. That, in turn, will increase the demand for the battery, which will, in turn, drive down the price of lithium ion batteries resulting in further cost savings for the company. We will talk about these scenarios in an upcoming piece. However, it will be interesting to see what the company envisions for itself with this new product.

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Notes:
  1. Tesla 8-K, Tesla Investor Relations []
  2. Ref: 1 []
  3. Tesla Motors CEO Discusses Q3 2014 Results, Seeking Alpha, November 2014 []
  4. Tesla Motors’ (TSLA) CEO Elon Musk on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 2015 []
  5. Ref: 3 []
  6. Energy Storage for a Sustainable Home, Tesla Motors, April 2015 []