Tesla Motors (TSLA), defying all analyst expectations, reported Q1 EPS of 12 cents per share, beating the average analyst expectation of 3 cents per share, raised 2013 guidance for Model S' sales to 21,000 and announced that were it not for production constraints, Tesla could sell significantly more Model S vehicles. This unexpected "big news" caused Tesla's stock to jump 30 percent after hours to a new 52 week high of $72.00.
Tesla Model S financing is a big deal
When asked about the impact of Tesla's new financing on demand, Tesla CEO Elon Musk noted that the majority of luxury sedans are financed, and that the rate being offered to Tesla had produced an increase in the reservation rate, and would be beneficial to long-term demand going forward. By offering financing, and bringing down the monthly cost for a Model S to $580, after removing the savings from not buying gas, Tesla has expanded its total addressable market by 10 million people in the United States. Most analysts, notably Morgan Stanley, are currently expecting Tesla to deliver 18,000 Model S vehicles in 2013 and 20,000 in 2014, with minimal growth going forward. Analysts are making a huge mistake assuming the addressable market for the Model S are buyers of "high end luxury sedans" who are opting to be included in the even smaller "electric car market." As I mentioned in my article, Tesla Model S Owners Could Realize Amazing Savings, anyone who can afford a mid range, $30,000-40,000 sedan can afford to buy a Model S.
Model S demand exceeding production capacity
During the conference call, when asked about the 21,000 Model S sales guidance, and the potential for upside, Elon Musk mentioned that Tesla was intentionally constraining production to maintain control of gross margins and overall costs. If Tesla is intentionally constraining production, to improve gross margins, demand for 2014, once the production kinks have been worked out, could be greater than anyone is expecting. Elon Musk mentioned that for 2013, he expects about 15,000 deliveries in the United States, 5,000 in Europe, and 1,000 in Asia. He also emphasized the point that gasoline is Europe is almost twice the American price, implying demand for the Model S should be greater. Tesla is still relatively unknown in Europe. If the reservation rate in Europe follows the trend of the United States, where Tesla receives two reservations for every delivery, demand for the Model S in Europe will increase exponentially as more cars are delivered, and more consumers learn of the benefits of owning a Tesla.
Analyst revisions must follow
Currently, no analyst is modeling for 21,000 Model S deliveries in 2013, and very few believe Tesla can achieve the 25 percent gross margins Elon Musk has projected for. Furthermore, most analysts have not accounted for the impact of ZEV credits on Tesla's profit. Elon Musk has mentioned that ZEV credits are not included in the 25 percent Gross Margins Tesla has projected for in 2013. Analysts are missing the big picture, and forgot to account for the very material effect of ZEV (Zero Emissions Vehicle) credits on Tesla's future profitability.
Since Telsa makes only zero emission vehicles it sells its ZEV credits to manufacturers who do not meet the requirements of the California mandate. The monies received defray in part some of the large R&D costs incurred in pioneering the development of the zero emission electric cars. (Tesla Motors)
Morgan Stanley's Adam Jonas, in his research note released a week ago, made note of the potential effect of ZEV credits on Tesla's future profitability.
Tesla made $40.5 million in selling ZEV (Zero Emissions Vehicles) and GHG (Green House Gas) credits to other OEMs in 2012, or $13,900 per completed vehicle. The negotiated value of the credits is function of penalty avoidance ($5k), reputational protection and development cost risk management by non-complying OEMs and the supply of ZEVs from competing EVs. A similar "Rev per ZEV" could add $250 million to Tesla profit in 2013. Unlikely, but what if? CARB's rules and failing EV competition funnel an unusual concentration of economic benefit to Tesla. (Adam Jonas)
Although Jonas realizes the bullish case for Tesla's stock, he has yet to include this "new information" into his price target. I suspect this will change now that Tesla has blown away Wall Street expectations, and proven that ZEV credits are very material to Tesla's earnings. In Morgan Stanley's initial coverage from 2011, a $135 "bullish" price target was assigned to Tesla. This price target assumed that sales of the Model S would remain at 20,000 units per year, with no growth going forward. Tesla has made it clear that Tesla is currently limiting itself to 21,000 units in 2013, to keep costs down, and maintain control over gross margins. This implies that once Tesla has worked out the kinks of its supply chain, and has improved the efficiency of its factory, greater production rates are likely to follow. In my article, Tesla Motors Amazing Future Earnings Potential, I posited that, under ideal circumstances, Tesla could be deserving of a $300-400 price target. The Tesla Factory is capable of producing 500,000 cars per year, and is currently tooled to produce about 50,000 cars per year. Tesla's revised guidance, and statement about future production has me thinking that Tesla may be preparing for demand of 60,000 Model S units in 2014.
Tesla has proven that it is ready for prime time, blew away analysts expectations of two cents per share in Q1, and has earned the right to be recognized as a real automobile manufacturer, rather than a niche player. Currently, no analyst was modeling for Tesla to earn 12 cents per share in Q1, and most were expecting Tesla to report 3-4 cents in all of 2013. Tesla has confirmed that it intends to be profitable for every quarter of 2013, meaning 30-40 cents per share is possible for 2013. I will be shocked if analysts don't announce significant upgrades to Tesla's stock price over the coming days, to account for this "big news." Tesla has demonstrated that it is capable of reporting a GAAP profit, and shown the world that the Model S is ready for prime time.