Despite Tesla's Light Results, It Could Be Turning The Corner

Feb.26.13 | About: Tesla Motors (TSLA)

Tesla Motors (NASDAQ:TSLA) announced its fourth-quarter and full-year earnings, which came in lighter than expected. Net revenues stood at $306 million in the fourth quarter, taking the full-year figure to $413 million. Management had already lowered the full-year revenue guidance to $400-$440 million at the end of the third quarter due to a delay in the ramp up of Model S production. Full-year losses widened to $396 million from $254 million in the previous year. Tesla sold 2,650 Model S cars in the previous year, 2,400 of which were in the fourth quarter alone.

Margins Will Be the Key

The full year numbers are a bit distorted because of the delay in the ramp up of Model S production. Since the company now derives most of its revenues from the sale of Model S cars, any delay in its production would greatly affect the top line. While the fixed costs remained more or less the same, revenues were naturally short of what they should have been -- and that's why margins were lower than expected. For the fourth quarter, gross margins were a tepid 8% -- although that is still a considerable improvement from -17% in the third quarter.

Going into 2013, Tesla's most important test will be if it can achieve the margins the management envisions. The company is very optimistic about achieving gross margins of 25% by the end of the year. We certainly believe there is upside to the current market price if those kind of margins can be achieved.

On the bright side, Tesla now has achieved the intended production capacity of 400 units a week (~20,000 units annually). And going by the initial response, it seems likely that the automaker will sell all the Model S cars it manufactures in 2013. As of Dec. 31, Tesla had already 15,000 reservations for the swanky electric car.

Until now, Tesla has reported losses, but that could soon change with the automaker expecting to be profitable for the first time in the first quarter of 2013. Tesla has already increased the price of Model S by $2,500 for registrations after Dec. 31, 2012, so the price hike might also help widen the bottom line. We believe the future earnings will be more reflective of the company's profit-generating ability now that its operations have stabilized.

We currently have a Trefis price estimate of $40 for Tesla, which is about 10% above the market price.

Disclosure: No positions.