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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