Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Tesla Motors (NASDAQ:TSLA) traded with massive gains in Thursday's trading session. The electric vehicle manufacturer reported its first quarter shareholder letter after the close on Thursday sparking a massive rally. Shares closed Thursday up 24.4%, exchanging hands at $69.40 per share.

The spectacular strong report is a game-changer for Tesla Motors and boosts the long term appeal of the shares.

First Quarter Shareholder Letter

Tesla generated first quarter revenues of $561.8 million, up 83% compared to fourth quarter revenues. In comparison, the company reported first quarter revenues of merely $30.2 million last year. Revenues spectacularly beat on consensus estimates of $493 million.

Revenues were driven by the production of 5,000 Tesla Model S vehicles of which 4,900 were recognized as revenues, above the company's own guidance of 4,500 vehicles.

Economies of scale and improving the efficiency of manufacturing is paying off as Tesla reduced the hours needed to produce a car by 40% over the past quarter alone.

All in all, Tesla reported a net profit of $11.2 million which compares to a $89.9 million loss in both the fourth quarter and first quarter of last year. Net profits came in at $0.10 per share on a GAAP basis and included a one-time non-cash gain of $10.7 million as a result of the elimination of the Department of Energy (DoE) warrant liability. Excluding the liability, GAAP earnings came in at $0.00 per share.

Non-GAAP earnings of $0.13 per share, comfortably beat consensus estimates of $0.03 as well.

Current And Future Growth

The successful Model S is priced significantly lower than the previous Roadster model. Future models will have even more advantageous pricing.

Still Tesla thinks the current Model S model will be affordable as the bank has set up extensive financing possibilities with US Bank and Wells Fargo (WFC). The company claims customers can buy the car without putting money down (excluding state and federal incentives) for just $580 a month. The company furthermore guarantees a re-sale price being the highest of any premium sedan made in volume.

Currently, Tesla only deliver cars in North America, yet the company is receiving orders at a rate exceeding 20,000 per year across the world. As such Tesla continues to see upside for deliveries in both Europe and Asia. To service the growing fleet of cars on the road, Tesla opened 12 new service centers for a total of 41 locations, with the intention to open another 30 during the remainder of the year.

The company has 34 stores worldwide with another 15 openings planned during the remainder of the year. Half of these stores will be opened in Europe and Asia.

Outlook

For the current second quarter, Tesla expects to build 5,000 Model S vehicles, and some vehicles will be sent towards Europe for anticipated deliveries in the third quarter.

Given the transit of vehicles to Europe, Tesla expects second quarter deliveries to come in around 4,500 vehicles. Tesla raised its full year guidance to 21,000 deliveries, upped by a thousand. Gross margins are expected to come in the high-teen digits.

Valuation
Tesla ended its first quarter with $214.4 million in cash and equivalents. This excludes $21.7 million in restricted cash. The company operates with $455.5 million in long term debt and capital lease obligations, for a net debt position of around $240 million.

For the year of 2012, Tesla generated annual revenues of $413.3 million, more than double the amount a year before. Losses increased to $396.2 million in the meantime.

Factoring in a 25% jump towards $70 per share, the market values Tesla Motors around $8.5 billion. This values the company at around 19 times past year's revenues. Note that first quarter revenues alone already surpassed last year's annual revenues. A simple extrapolation implies that Tesla could generate annual revenues of around $2.0 to $2.5 billion, valuing the business at a much more acceptable 3.8 times revenues.

Some Historical Perspective

Shares of Tesla Motors went public in June of 2010, when shares were offered to the public at $17 per share. After a successful offering, shares have mostly traded within a $20-$40 trading range. Shares broke out to the upside in March, as they doubled for the year, currently exchanging hands at $74 per share.

Between 2009 and 2012, Tesla has nearly quadrupled its annual revenues from $111.9 million to $413.3 million. The company has reported ever increasing losses in the meantime, peaking at $396.6 million in 2012.

Investment Thesis

The combination of higher sales, increasing gross margins and continued focus on operating expenses, are resulting in rapid improvements to the bottom line.

Besides the spectacular revenue growth over the past quarter, gross margins increased from 8% to 17% over the past quarter. At the same time, Research & Development expenses fell by 23% on the quarter to $54.9 million as a result of the Model S launch over the past quarter. Selling, general & administrative expenses rose very modestly to $47.0 million.

Still the outlook for the year looks very promising. The company is on track to generate annual revenues of at least $2 billion. More importantly, Tesla is guiding for gross margins of 25% in the final quarter of the year. That even assumes no proceeds from zero emission vehicles (ZEV) credits, which came in at $68 million over the past quarter.

With annualized gross profits around $500 million by the end of the fourth quarter, assuming a gross margin of 25% on revenues of $2 billion, Tesla is on track to report operating earnings of around $100 million assuming operating expenses remain at these levels.

While this still results in a steep valuation, it entirely leaves out the possibilities for proceeds of zero emission vehicles credits.

Yet it is extremely important to understand that Tesla is not demand constrained, but actually is production constrained as it is currently focused on expanding margins by optimizing its production process, thereby missing out on revenues.

Yet there a more positive signs going forwards. Consumer Reports rated the new Tesla Model S with a 99 out of a 100 score. Tesla furthermore sees strong demand for 15,000 vehicles in the US for the year, with a global demand of 30,000 units. Especially in Europe were gasoline expenses are very high, electric-based cars should be able to gain traction. One should also not forget that CEO Elon Musk has an excellent track record in building former business entities PayPal, which is currently owned by eBay (NASDAQ:EBAY), and SpaceX.

While there is a lot of debate about the implications for the remainder of the year, and a stagnation of production in the second quarter, important is to realize that the company is capacity constrained, and is not complaining about customer demand. The increased financing possibilities, overseas expansion, and increased media coverage increases the appeal and potential market for the brand by the day.

This earnings report is a true game-changer. Despite the massive returns in Thursday's trading session, and the incredible run-up in shares over the past weeks, I will contemplate taking a long position.

Source: Tesla Motors - Spectacular First Quarter Report Is A Game Changer