Tesla Motors Preview: Strong Results Should Keep Rolling

TSLA: Tesla logo

Tesla Motors (NYSE:TSLA), which has been consistently hitting new highs, will announce its second quarter earnings on August 7th. Shares of the company have tripled this year helped by the exceptional first quarter performance, which smashed all expectations. Tesla is one of most talked about companies at the moment with the automaker’s disruptive innovation compared to the likes of Apple. Here are some of the key things to look out for in the upcoming earnings.

See full analysis for Tesla Motors

a) Gross Margins

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In the first quariter, the company’s gross margins were 17.1%. [1] However, this includes the sale of ZEV (Zero Emission Vehicle) credits to the tune of $85 million. If you exclude the impact of regulatory credits, the automaker’s gross margins would have been less than 6%. Tesla’s management has set an ambitious target of achieving 25% gross margins by the end of the year, without including income from the sale of credits. Thus, the magnitude of margin improvement will be one of the most important numbers to watch. It will also give an insight to the kind of numbers that are sustainable in the long run.

Tesla has a target of achieving 25% gross margins in the long run. The Model S is a luxury electric. You can expect heftier gross margins for this model. Tesla’s future projects such as Gen III (the price of which will start from ~$30,000 after tax credits) will probably have lower margins. Thus, if the automaker is struggling to achieve the desired margins with the Model S, achieving 25% gross margins once the lower margin, high volume Gen III goes on sale in two to three years time will be all the more difficult.

b) Unit Sales

Tesla raised the full year sales forecast of the Model S to 21,000 units from 20,000 during the first quarter earnings release. According to the management, demand for Model S is exceeding the supply, so we’re confident the company will sell every vehicle produced this year. There is a backlog of orders as well so the automaker shouldn’t have any problem in meeting its guidance forecast during the first quarter earnings. [1]

If Tesla is able to raise the production level to more than 21,000 for the full year, it will be safe to assume that the automaker will have no problem in selling those incremental units.

The average revenue per Model S sold could see a decline in the second quarter. In the first quarter, the automaker recorded an average revenue per vehicle of close to $115,000. However, most of the cars that were delivered were the premium 85 kwh battery pack models. Tesla’s management acknowledged that it expects a greater proportion of sales to comprise of the lower priced 60 kwh model in the subsequent quarters. Keeping this in mind, we expect the average revenue per model to decline by about 2% in 2013.

c) Operational Efficiencies

Fast growing companies often see huge improvements in operational expenses when expressed as a percentage of revenues or profits. And this is true for Tesla as well. For example, in 2012, the adjusted selling, general & administrative (SG&A) totaled $129 million, which translated to more than 400% of its gross profits. But due to a huge surge in gross profits from additional production capacity, we now expect SG&A expenses to equal $190-$200 million or about ~32-33% of the expected gross profits for 2013.

We have a price estimate of $69 for Tesla, which is about 40% below the current market price.

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  1. TSLA 10-Q [] []