Tesla Motors (TSLA) is scheduled to announce its Q1 earnings on May 8. The stock has been on fire lately after CEO Elon Musk announced that the company will be profitable for the first time ever, and the market seems to be eagerly waiting to see how big the bottom line will be. Turning profitable is a crucial milestone in the progress of a company that is still in its early days. Tesla's full-year losses widened to $396 million last year from $254 million in 2011.
In April, the automaker announced that it had managed to sell 4,750 Model S cars in the quarter, exceeding its own guidance of 4,500 at the start of the year. Since most of the top line is generated from the sale of Model S cars, Tesla's revenues should total somewhere between $350 million and $400 million in the first quarter (i.e., 4,750 multiplied by the average price of $70,000-$80,000).
There have been other positive developments for the company, although those won't have much impact on the first-quarter numbers. Tesla unveiled a new leasing program for its Model S in which the company will assume the risk associated with the residual value of the car. That certainly mitigates any apprehensions of potential buyers about the resale value of the vehicle. Since the Model S is a relatively new car, it's hard for customers to estimate how much the car will sell for in around two to three years' time.
Margins Are Critical
Watch out for the gross margins. The automaker is extremely confident of achieving gross margins of 25% by the end of the year. The corresponding figure stood at a tepid 8% in the fourth quarter of 2012, but that was largely because of disruptions in Model S production, which impacted its top line negatively. While the fixed costs remained more or less the same, revenues were naturally short of what they should have been and that is the reason why they were lower than expected. This time, expect the margins to expand significantly, although how close they are to the target level of 25% is yet to be seen.
Since the Model S production had already hit the company's intended target of 400 units a week by the end of 2012, it was only a matter of time before the company turned profitable, depending on when it reached a sustainable production level to meet the real demand. So, Musk's announcement of the company turning profitable, although positive is not all that surprising. We will be more interested to know whether there has been a real improvement in margins.
Disclosure: No positions.