On Wednesday evening in the after-hours, Tesla (NASDAQ:TSLA) announced its earnings for the last quarter. The company reported a loss of 65 cents per share whereas analysts were expecting it to report a loss of 53 cents per share. The revenues of $306 million beat the average analyst estimate of $299 million by a small margin. In the after hours of Wednesday and regular trading of Thursday, Tesla saw a sell-off, which shaved off about 10% from the company's share price as of the time of writing this article.
Furthermore, the company announced its outlook for this quarter and the full year, which didn't seem so bad. Basically, the company expects to produce and deliver 20,000 Model S units in 2013. Also, Tesla is expecting to have a gross margin of 25% starting from the second half of the year. In addition, the company increased its net reservations from 13,000 to 15,000, which suggests that it doesn't really have an issue with the demand as long as it produces enough cars to meet such demand.
As a result of the last quarter's report, Bank of America (NYSE:BAC) downgraded Tesla to "underperform" with a price target of $30, which is significantly below the current price of $34.50. Were Tesla's results that bad? While I wasn't that impressed with the company's results, I don't think they are bad enough to warrant so much fear either.
During the conference call, Elon Musk explained to the investors that fewer than 10% of the buyers were actually ordering the small battery pack, whereas every third buyer was ordering the largest battery pack, which the company wasn't expecting. If this trend continues, the profit margins will be high for the company in the future because the higher battery packs come with higher margins. The starting price for the smallest battery pack is $60,000 (minus the $7,500 tax credit) and the price moves up to $70,000 (minus the $7,500 tax credit) and 80,000 (minus the $7,500 tax credit) for the next two models. According to Elon Musk, less than 10% of the people are buying the $60,000 model and a third of the people are buying the $80,000 model. If the company sells 20,000 Model S cars in 2013, we will be looking at 2,000 cars with the smallest battery pack, 6,600 cars with the largest battery pack and the rest of the cars will have the medium battery pack. We are practically looking at revenue of $120 million from small battery packs, $800 million from medium battery packs and $528 million from the large battery packs. This effectively gives us a revenue figure of $1.45 billion for 2013. Keep in mind that the company expects to have a gross margin around 25%, which gives us an operating profit of $362 million. Currently the company's market value is a little less than $4 billion, which means the price-to-operating-profit ratio will be around 11. This is not bad for a company that has a lot of potential growth.
Then again, we are assuming that the company will actually meet its targets for 2013. This includes being able to produce, deliver and sell enough cars and keep generating more demand along the way while cutting some costs such as employment-related costs. During the conference call, Elon Musk also pointed out that the average waiting time was around five months. This can be tough for the consumers that agreed to pay a lot of money to obtain one of these cars. The company will have to find a way to reduce the waiting time in order to have a positive impression in buyers' eyes so that they are more likely to recommend the company's products to their friends.
Because Tesla cars are specialty cars with a high price tag, the future sales of the company will depend highly on word of mouth. The number of people who can afford and are willing to buy one of these cars will not be very high. Those who currently own this car can recommend it to their close friends who may have similar tastes and income levels. The more people go around saying how happy they are with their car, the more people will want to buy these cars.
Until recently, I had always been a skeptic of Tesla Motors. In fact, I wrote a few articles saying that the company might not make it. Later on, I became "cautiously optimistic" regarding the company and I still feel the same way. If the company can indeed meet all its production and delivery goals, we are looking at a nice valuation.
Can Tesla actually meet its goals in 2013? There are so many variables in play that it is difficult to tell whether the company can actually meet its goals. In the short and medium term, the demand side looks good, but it is difficult to tell what will happen once the backlog of 15,000 orders is completely cleared off. The supply side also looks fine for the time being, but the company still has to ramp up the production according to the plan.
This will be an interesting story as it develops. As long as Tesla is on track with its short- and medium-term goals, the stock should go up in the same period.
Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.