Tesla Motors (NASDAQ:TSLA) has returned over 27% during the past six months. The stock has been one of the best performers in the industry. Effective execution of the strategies and innovation are the main factors behind the success of the company. In the first quarter of 2013, Tesla is likely to report its first ever quarterly profit, mainly due to the impressive sales of Model S. The stock price has been moving up due to the positive news about the earnings of the company.
Tesla was founded in 2003 by Elon Musk, the current Chairman and CEO, and JB Straubel, the Chief Technology Officer. The company gained company commercial recognition with the production of Tesla Roadster, the first ever fully electric sports car. Tesla is currently expanding operations in Europe and North America. Moreover, it owns its sales and service network, and it also acts as an original equipment manufacturer by manufacturing vehicle components that are also sold to other companies.
Turning Profitable Soon
Tesla's shift to profitability has been possible due to the remarkable performance of Model S - sales for Model S exceeded expectations, and the company sold 4750 units in the first quarter, 250 more than its own estimates of 4500 units. Model S is a luxury car, and it is meant for the high-end customers. The company has clearly shown that it is not going to shirk away from the competition in the high-end vehicles segment. It is usually extremely difficult to take market share from established luxury cars manufactures. More than expected sales of Model S indicate that the customers are willing to try new models as it is particularly difficult to persuade customers to give up traditional cars in favor of electric models. The company has also cancelled its version of 40kWh battery which is likely to raise the firm's average selling price and therefore, improve margins.
Furthermore, Tesla has recently partnered with US Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) to introduce a plan of financing its high priced cars. The offer includes a period of 63 months at a rate of 2.95% annually with 10% down payment. By doing so the company has opened itself to a different consumer base, essentially ones with relatively lower incomes. As a result of this plan, the company has increased its customer base and it should have a positive impact on sales in the future.
Daring Strategies and Risks
Continuing the run of effective strategies, the company has guaranteed its customers that it will provide them with the option of selling the car back to the company at a residual value of approximately 43%. Apart from being a daring strategy, this says a lot about the kind of confidence the company has on the performance of its products. The announcement gives confidence to existing as well as potential customers about the products they are using or plan to buy. Strategies like the one mentioned above can also have an extremely negative impact on the company. We have seen how it can positively impact sales; however, it is only fair that we look at the other side of the picture as well. Tesla can come under extreme pressure if the customers decide to avail the offer and sell their vehicles back to the company. Cash flows will be negatively impacted, and it will not be a pretty sign for a company with already negative cash flows from operations.
However, up till now, these strategies have been hugely beneficial for the company. Tesla's annual revenues have increased from $14 million in 2008 to $413 million in 2012. The financial performance of the company is a clear indicator of this growth as the total assets of the company have increased from $52 million in 2008 to $1.11 billion in 2012. Similarly, the gross margins of the company in 2009, 2010 and 2011 were 8.5%, 26%, and 30.15% respectively. This momentum was slowed down in 2012 due to a significant increase in costs resulting in a gross margin of only 7.28%, and an annual net loss of $396 million or $3.96 per share. This deterioration in performance is particularly associated with the performance of last three quarters of 2012 as the initiation of Model S deliveries served as the primary driver for the increase in cost of automotive sales. These issues have been addressed in the first quarter of 2013 as the company turns to profits.
There are always considerable risks involved while investing in a start-up company. However, in Tesla's case, risks arise from the daring strategies followed by the company rather than the market. At the moment, bigger players in the market such as Porsche and Daimler AG do not consider Tesla as a big threat. Furthermore, Tesla's status as parts and components supplier to other manufacturers provides it with some diversification. Following risky and daring strategies shows management's level of confidence in their products. However, a small slip while facing such strategies can bring the company in hot water. As a result, significant attention should be given to the risks while considering an investment in Tesla Motors. Nonetheless, these strategies have paid in the past for Tesla and the company might benefit from its strategies in the future as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.