Tesla Motors (Nasdaq - TSLA) -- Stock Price Jumps After Guidance Revision

Tesla Motors (Nasdaq - TSLA) shares hopped 15.7% on Tuesday after the company revised its guidance for Q4 2014. The price was up to $161.27 in after hours trading. It had closed Monday at $139.94.

Tesla confirmed earlier in the day that it sold 6,900 cars in the fourth quarter, a new record for the company as well as a roughly 20% increase over its previous guidance for the term. We've revised our full year 2013 revenue estimate to $2.41 billion and our EPS estimate to $.42. 

Demand for the Model S remains strong enough that the company will likely meet, and possibly exceed, its goal of 30,000 deliveries in 2014. Tesla is also optimistic that it will be able to begin shipping its new SUV offering, the Model X, sometime in the fourth quarter. The Model X will be priced about 6% higher than the Model S to start, or about $74,000. However, considering most customers will likely opt for the higher performance battery and other options, we're estimating most customers will wind up paying somewhere between $105,000 and $110,000. For these purposes, let's say $107,500 per Model X. If Tesla can deliver 200-300 Models X by the end of 2014, that's another $21.5 million - $32.3 million in revenue.

Elon Musk and a Model X

Perhaps the company is being optimistic, and the Model X doesn't arrive until early 2015. It won't have much of an impact long term. Tesla doesn't disclose reservation statistics any longer, but the general consensus is that about 7,000 orders were put in for the vehicle through the end of the fourth quarter. 

The price jump came despite Tesla also issuing a "recall" for a Model S charging adapter, which in some cases have heated up to the point of melting and have resulted in short circuiting and possibly fire. We put "recall" in quotation marks because no parts actually need to be replaced. The problem is being addressed with new software that Model S owners download and install to the car, so think of it more as an update. Tesla shouldn't fret too much about fire concerns as long as the incidents are few and far between. After all, gasoline powered cars can catch fire too.

The better-than-expected sales in the fourth quarter bode well for 2014 and beyond. The company is aiming to manufacture 30,000 cars in 2014, roughly 50% more than 2013. Tesla's factory in Fremont seems capable of getting the cars assembled. The main impediment has been getting its hands on the lithium battery packs. A new deal with Panasonic is expected to lower costs and give Tesla more battery inventory, but the pact won't alleviate the shortage in the near term.

Demand for the batteries will skyrocket once Tesla begins work on its third vehicle, a more affordably-priced car that's tentatively known as Model E. The car is still only being discussed, but the company is aiming for a $33,500 sticker price. Tesla is also considering building a factory of its own to meet battery demand.

Tesla shipped about 1,000 cars to Europe in Q3 2013, and is hoping to begin selling to Asia in 2014. The company is still expanding its network of Supercharger stations in America and Europe. There are 65 stations in North America, and 14 in Europe. The stations can give a battery a full charge in an hour, or top them off in about 20-30 minutes, free of charge. The Supercharger network still needs to expand considerably to make it more convenient for local drivers. The company boasts that a Model S can be driven across country without having to pay for a recharge. Realistically though, how many times will a person use the car to drive cross country? An average of once seems like a high estimate.

Current Supercharger network

Planned Supercharger network by year's end 2015

The difference between the network as it stands now (top) and what it projects to in 2015 (bottom) appears striking upon first glance, but the chargers are still spread far enough apart that using them for local driving will be a nuisance unless the car owner lives relatively nearby. Once the Model E arrives, though, owners could utilize the chargers to take long-range trips or vacations for free (though it'd be significantly more time consuming than flying). Tesla will keep adding the charging stations, which cost $150,000 - $300,000 per site, but don't require an attendant to monitor them.

Tesla Motors (Nasdaq - TSLA) Still Cruising Despite Concerns

It seems nothing can go wrong for Tesla Motors (TSLA $166.00). The stock price has quadrupled since the beginning of the year, even in the face of concerns about the company's ability to manufacture and deliver its Model S, potentially damaging reviews, and several states have banned Tesla from selling the electric cars within their borders. In California, the Model S has outsold other luxury car manufacturers such as Porsche, Jaguar, and Land Rover. The U.S. National Highway Safety Traffic Administration recently gave the car the highest-ever crash safety rating.

There are questions that remain, such as how the car's battery will perform a year or two down the road, and if the battery charging infrastructure that Tesla is installing across the country will be adequate for the car to function as a primary vehicle. CEO Elon Musk is planning to take his sons on a cross-country road trip in the Model S, and charging it only at the company's network of Supercharger stations. The network is growing, but even in the areas with the most charging stations (California and New York/New Jersey), the Superchargers are too few and far between to make using the Model S for everyday activities realistic, much less convenient. The closest Supercharger station is 11.5 miles from my residence. The next closest is 83.5 miles away. I'm not sure exactly how many gas stations are within 11.5 miles from me, but I'd guess it's a few more, at least.

The Superchargers are free to use and solar-powered so the car is operating on zero emissions post-manufacture (mining the lithium used for the battery is not environmentally friendly). Tesla is going to need to drastically expand the Supercharger network to make the upcoming Model X work. It's being marketed to the middle-class, so it most likely will be used by people to commute, bring their kids to activities, etc. Tesla is claiming that by the end of 2014, the network will cover "80% of the U.S. population and parts of Canada," whatever that means.

The Superchargers are only practical for traveling between cities, something the average motorist isn't doing regularly. So an owner would have to plug the car in at home, pay for the electricity to charge the car, and say goodbye to the zero emission claim, since most of the electricity in the U.S. is still produced by fossil fuels. The car itself may not emit greenhouse gases, but the power plant charging it up still does. Also, while the Supercharger can give the battery a 50% charge in 20 minutes, it takes considerably longer to juice up at home or other charging stations. The battery also drains when the car isn't in use, so it has to stay plugged in.

Resale value is another factor that could have an effect on sales moving forward. The Model S hasn't been out long enough for anyone to be sure how well they age. Some studies have estimated that the battery packs in the Roadster, the precursor the Model S, will keep 70-85% of its initial capacity after being charged 300-500 times. Tesla says it should retain about 70% after 50,000 miles. Others have speculated the battery could last 20 years. But there are myriad factors that contribute to battery health, and there isn't enough data available for anyone to know for sure.

What we do know is that the battery packs are expensive, and the secondary market would be impacted if buyers were forced to install a new battery in an old car. But the cost for a new battery has been declining, so it may turn out to not be of great concern.

Potential Model X customers are probably willing to overlook these concerns. Tesla is cool right now. Musk is trending into Steve Jobs territory. The Model S has received rave reviews from publications and owners, and was named the 2013 Motor Trend car of the year. The Model X could be a hit if it can do a good enough job of replicating the experience of driving the Model S while slashing the price tag.

Customers can reserve a Model X for a refundable $5,000 ($40,000 for the "Signature" edition) right now, even though the car isn't expected until late in 2014. And that's just when the first shipment is expected. Someone could leave $5,000 in limbo for a car that takes at least a year and a half to arrive, or, according to Tesla's terms of service, might never arrive. Five-thousand dollars probably isn't a big deal to someone who can afford the more expensive Model S; middle-class families surely would be less inclined. And since the reservation price is fully refundable, those who decide to place an order have a lot of time to decide whether or not they really want to go through with it.

Tesla has been running more smoothly this year than many thought they would. The Model S pushed the company into profitability. It's critical that the Model X succeeds for Tesla to take the next step. A good deal of that success hinges on the company's ability to grow its Supercharger network. Time is working both for and against Musk & co. We'll see if they can pull it off.

Tesla Motors: Ramping Up Production

It’s a make or break year for Tesla Motors (TSLA $35.30). The high-end electric car manufacturer is ramping up production on its Model S almost tenfold from 2012, to an expected 20,000 vehicles. The demand is there; the question is whether or not Tesla can keep up with production without hurting margins. We’re estimating that Tesla will post positive pretax margins this year (2%), a first. The company’s guidance suggests that gross margins will approach 25% by the end of the year, not counting the zero-emissions credits it receives from the government.

Right now, about three-quarters of sales are made in North America. Model S sales have been almost exclusively made in the U.S. so far. Elon Musk, the CEO, mentioned in the Q4 earnings release that only two Model S sedans were on the road in Europe at that point. Sales in Asia were almost non-existent. But Tesla plans to market more aggressively in those places this year. 

Tesla will be in a good position if it gets close to its 20,000 vehicle goal. We’re estimating $1.7 billion in revenue for the year, right around 17,000 cars sold. Musk also claimed that the negative review in the New York Times would cost Tesla $100 million this year. The effect remains to be seen, but it seems an exaggeration. The company could withstand a hiccup in production here or there since there isn’t much in the way of direct competition. Fisker, its chief rival, just had its founder step away, the latest in a series of mishaps. Electric cars from major manufacturers like the Nissan Leaf don’t offer comparable performance or luxury to the Model S. There is some competition with gas-powered luxury sedans, but for the most part sales are made to people who are already interested in driving an electric car. Since Tesla is relying on word-of-mouth, it’s got to keep its customers happy. Significant delays would lead to cancelled orders, and some potential buyers would put off buying a Tesla or lose interest altogether.

Shares are likely to post earnings this year. We estimate a $.17 EPS, but that’s achieved by adding back the stock-based compensation expense. Our calculations suggest income of about $30 million. Tesla’s official accounting will be closer to break-even. The stock price is high compared with earnings, and Fisker’s troubles show that there is plenty of risk in electric cars. Tesla will be in a much better spot if it can get through 2013 without any major trouble. The company’s crossover style Model X is due to start shipping early in 2014, and the car is already receiving reservations. Musk thinks the market for Model X will be about 70% that of the Model S.

Tesla doesn’t advertise its cars like traditional manufacturers. The company does have ads, but has gotten the word out principally through its Tesla Stores and word-of-mouth. Most of the Stores in North America are located in malls. This helps to lure in curious shoppers, and the centralized locations are convenient for people who live in the area. There are currently 25 Stores open in North America (24 in the U.S.), with four more opening in the coming months. There are more service centers opening up for customers that don’t live near a gallery. At the moment though, the network is sparse if you live in, say, Cleveland. The closest Store is in Toronto, the closest in the U.S. in Chicago. And the nearest service center would be two and a half hours away in Columbus. For now, the convenience really only applies to people in Southern California and New York/New Jersey. 

The company needs to develop a strategy to deal with bad press. John Broder’s New York Times piece is the most well-known example. He claimed the Model S’s battery struggled during cold temperatures. Musk responded with data logged during Broder’s test drive, and claimed the Times report was dishonest. At its core, it’s a he-said, he-said feud, and all it will do is invite others to investigate the battery’s performance. This post shows cold weather has a significant impact on battery life.

The battery itself has also come under attack recently, from Wall Street Journal opinionist Bjørn Lomborg. We’ll take what he says with a grain of salt, because he is a known green energy nemesis. He argues that electric cars, despite claiming zero emissions, actually leave a greater carbon footprint than gas vehicles. Research shows that it takes twice the amount of energy to manufacture an electric car than a gas-powered one. Most of this energy is spent mining lithium for the battery. Charging the car also uses electricity, which is still predominantly generated using fossil fuels. Tesla’s Supercharger stations are solar powered, but there are only nine of them in the United States. The company plans to install 100 by 2015. The company suggests keeping a Model S plugged in when not in use, because the battery depletes even if the car isn’t running. Unless owners can find a renewable energy source to keep their cars plugged into, the Model S becomes less environmentally-friendly than advertised. Lomborg says government incentives to electric car manufacturers and buyers don’t match the actual environmental savings. This technology is still fairly new though. Lomborg should realize that a true zero-emissions car won’t just appear out of the blue. It’s going to take some work. 

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