Tesla Motors (NASDAQ:TSLA) revenues jumped substantially in Q3 due to strong demand for Tesla Roadster, higher powertrain component sales to its partners and increased revenues from development activities for Toyota (NYSE:TM) RAV4 EV. But Tesla’s costs also increased substantially year-over-year, primarily due to higher R&D costs. Even though we believe R&D costs will continue to increase rapidly substantially over the long-term, we expect Tesla will be able to rein them in to more sustainable levels after completion of work on Model S and Tesla Factory.
We currently have a price estimate of $41 for Tesla’a stock, which is about 20% above its market price.
R&D costs to peak in 2012 before reaching more sustainable levels
Tesla R&D expenses more than doubled in Q3 on year-over-year (yoy) basis, as the company made significant progress towards launching Model S next year. The R&D expenses included expenses related to Model S beta prototype build, development of the Tesla Factory, significant engineering, design and testing work being undertaken at the supplier end to support Model S readiness. Moreover, Tesla has also begun design and engineering activities related to Model X crossover prototyping, which added to R&D expenses. But even though annualized 2011 R&D expenses are more than double its levels in 2010, R&D expenses as a percentage of revenues have decreased from 80% in 2010 to around 70% in 2011 due to a larger rate of increase in revenues.
We expect that R&D expenses will continue to increase through next year as efforts to launch Model S gather pace, through higher expenses of engineering and testing the Model S as well as preparation of the Tesla Factory for production. Thereafter we expect that R&D levels will decline from its 2012 levels, even though advanced engineering work on Model X will continue, as Tesla will be able to use Tesla Factory and leverage Model S platform to prototype and develop Model X. Also we expect that Tesla’s expenditure on providing engineering support to its suppliers will reduce.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Tesla’s stock value.