Tesla Motors (TSLA) is a company to which many investors are emotionally attached. There are Tesla bulls who say that this electric car maker will disrupt the entire auto industry. Then there are bears who say that Tesla's vehicles are just a fad and cannot compete with Internal Combustion Engine (ICE) and hybrid vehicles due to their high price and range concerns. Such skeptics were in such a large number that just a few weeks ago, short interest accounted for almost half of the stock's float. However, short sellers have been on the run since Tesla Motors amended its guidance at the start of April to reveal that the company had sold more Model S units than expected and would reveal a GAAP and non-GAAP quarterly profit for the first time; the stock is up more than 40% since the announcement as the shorts got squeezed. In this article, I will give an overview of what to expect from Tesla's upcoming earnings release, and discuss if the short squeeze in Tesla Motors stock can continue.
Here are analysts' estimates for the upcoming earnings release:
Source: Yahoo Finance
In addition to the headline numbers, here are some of the key underlying metrics that I would focus on:
For me, the most important metric in the upcoming earnings report would be the gross margin. In the Q4 2012 shareholder letter, CEO Elon Musk told investors that the company faced gross margin headwinds in the form of low fixed cost absorption, manufacturing inefficiencies and supply chain problems. On the Q4 earnings call, Tesla's management said that it would streamline its production process and supply chain in order to focus on cost reduction this year. Specifically, Musk said that he wanted to lay off the temporary labor force hired deal with inefficiencies in the initial production ramp-up and to cut down on expensive overtime costs. For Q1, Tesla management guided to a gross margin in "mid-teens" versus gross margin of 8% in Q4; for the full year 2013, Tesla Motors is targeting a gross margin of 25%. In the upcoming earnings release, investors would be expecting a gross margin of at least 15%. That Tesla was able to produce slightly more Model S units than earlier expected indicates that its assembly lines are running smoothly and gives investors hope of a better than expected gross margin figure.
Many investors use the net reservations figure as a proxy for Model S's demand and will be watching the reservations number again in the upcoming earnings release. Tesla added more than 6,000 reservations in Q4 as its net reservations increased to more than 15,000 in Q4 from about 13,000 in Q3 2012. However, Tesla has warned investors not to be surprised by a slower pace of reservations in Q1. This is partly due to some potential Q1 reservations being pulled ahead into Q4 2012 as customers reserved their vehicles earlier to avoid the announced price increase that took effect on December 31st. Moreover, as Tesla ramps up production this quarter, it is likely that increased production and some cancellations more than offset the increase in the number of reservations, implying that the net reservations number could come off from record highs. So don't be surprised by a moderate pull-down in the net reservations figure; a lower number would not necessarily imply reduced demand.
Average Selling Price
In its April guidance amendment announcement, Tesla also revealed that the demand for its 40 kWh Model S was very small due to which it was cancelling production of the smaller battery option. "Customers are voting with their wallet that they want a car that gives them the freedom to travel long distances when needed," Tesla's press release stated. This is good news for Tesla because it will drive the company's revenues and profits higher. However, the sales mix between the 65 kWh, 85 kWh and 85 kWh 'performance' options remains to be seen. That is why I will be keeping an eye on the average selling of the vehicles price to see if more customers prefer the high end options, which would be bullish for the company.
In the Q4 2012 earnings call, Elon Musk claimed that Tesla Motors could reach its sales target of more than 20,000 cars this year even if they closed down all their stores and made no marketing efforts. "As we are thinking about demand generation, it's really not about this year, it is about how do we exceed the 20,000 unit number next year," he said. One of the key factors that would drive demand in 2014 and beyond would be international expansion. In the previous earnings call, Vice President Sales, George Blankenship, told us that about 25% of Model S reservations were from outside North America despite Tesla not having any display units outside the region. He said that Tesla would start marketing the Model S heavily in Europe and then in Asia as the year progresses; Tesla is expected to open new stores in China, Hong Kong, and Japan later this year. In the upcoming earnings call, I will be looking for Tesla's management to reveal more about its marketing efforts outside North America to get a sense of when the company would be able to derive meaningful sales outside North America in the coming months and years.
By updating its guidance in April, Tesla Motors has generated pretty high expectations for its upcoming earnings release, raising fears that Tesla might disappoint relative to the high expectations. However, by reporting a better than expected gross margin, a high average selling price and giving investors more visibility about its international expansion plans, the upcoming earnings release can improve the sentiment around the stock even further. Moreover, since Tesla was able to overcome its production constraints and make 250 more vehicles than expected, there is a chance that Tesla would be able to beat its own expectations of selling 20,000 cars this year; any such comments from Tesla's management in this regard could hurt short sellers a lot. Remember, as of April 15th, Tesla Motors still had a short interest representing more than 42% of its float. Despite the recent short squeeze, Tesla would still have a significant amount of short interest and the shorts could be squeezed further Tesla reports strong underlying metrics. That is why I believe that the recent short squeeze in this stock could just be the tip of the iceberg.