Automobile companies have certainly had their fair share of problems over the past 5 years. In fact, it took a government bailout of the Big 3 just to allow the industry to survive. And while many of the traditional auto companies have had stagnating share prices over the past couple of years, one company has soared. That company is Tesla Motors (TSLA). Below are 6 reasons to consider investing in Tesla right now.
Reason #1: Potential For Supercar With Google
Tesla and Google (GOOG) have recently begun discussions regarding technology that will allow cars to drive themselves. Google has actually already been working on this technology for sometime but given the success that Tesla has already had and the plans it has for the next couple of years, it's a logical step for the company to go down this road in the future.
Some manufacturers, such as Nissan Motors (NSANY.OB) do not think that these self driving cars will reach dealerships for at least another decade, if not longer. But Google believes it can be done in 5 years. Perhaps a partnership with Tesla would allow the two giants to get it done even quicker.
The trick is going to be using the right technology. In the article linked above, Tesla CEO, Elon Musk, discussed some of the various options. Musk believes that cameras with software is the best way to go. These cameras will be able to observe what is occurring on the road and make the correct driving decision. Google on the other hand, has been using laser-radar devices in its driverless fleet of Toyota Prius hybrids. Musk states that Google's approach is effective but too expensive. As Tesla tries to reduce the cost of its own vehicles over the next couple of years, it is imperative to maintain that cost effective approach in a "supercar" as well.
In that same article, Musk was quoted as saying the following:
I think Tesla will most likely develop its own autopilot system for the car, as I think it should be camera-based, not Lidar-based. However, it is also possible that we do something jointly with Google.
So while a production collaboration hasn't been agreed to, it certainly is a possibility. Any sort of official announcement in the future would likely send the shares of both Tesla and Google soaring. And as we look to the future, Tesla's potential doesn't stop there.
Reason #2: Catalysts
While looking at past performance is certainly helpful when deciding to make an investment, looking at the future potential is perhaps even more important. In a recent interview with Bloomberg, Elon Musk, revealed several important concepts that the company is working on.
- In July, Tesla will begin selling its Model S sedans to Europe. Currently the company has only been distributing in North America.
- In the 4th quarter of this year, Tesla will begin selling its Model S sedans to Asia.
- Next year, Tesla will begin selling its Model X sedan
- Elon Musk's goal is to produce a 3rd generation in 3-4 years that is half the cost of the current Model S. He also hopes that this model can have a range of at least 200 miles.
Reason #3: Fundamentals
Tesla recently reported its quarterly earnings on May 8, 2013. For the first 3 months of 2013, Tesla revealed that it generated its first quarterly profit in its 10 year history. Now if we start on the balance sheet, we will see that Tesla did a lot of good things. First,it was able to increase its available cash during the last 3 months by $12.5 million to $214.4 million. At the same time, Tesla reduced its long-term debt by $12.7 million. Investors should take notice anytime a company can grow cash and reduce long-term debt.
And while that is great, the income statement is where the company made real progress. For the three months ended March 31, 2013, Tesla generated sales of $561.8 million, an increase of over 1000% from the $30.2 million the company generated during the same period a year ago. The company's gross profit was $96.3 million, a substantial increase over the $10.2 million during the first 3 months of 2012. And lastly, and most importantly, Tesla generated a net income of $11.2 million. That is a huge turnaround given that company lost $89.9 million during the same period a year ago.
Reason #4: Rechargeable Car Sales Compared To Competition
Tesla's impressive quarter was due to several things. First, the company managed to sell 4,900 Model S sedans, which surpassed analysts expectations by more than 250 vehicles. Additionally, Tesla raised its 2013 forecast. Tesla now expects to sell 21,000 Model S sedans by the end of 2013. Second, this meant that Tesla was the top seller of rechargeable cars in North America, surging past Nissan Motor and General Motors (GM). Nissan sold 3,695 Leaf vehicles and General Motors sold 4,421 Volt plug-in hybrids. Clearly Tesla has found itself and seems to be on the path to greatness.
Reason #5: Financing
Last week, Tesla announced several new financing deals. First, Tesla revealed that it completed a secondary offering of its common stock. Tesla is going to sell 2.7 million shares to help increase its cash pile. With the stock trading at around $90 per share, the company can expect to raise somewhere in the neighborhood of $240 million. Two things are really impressive about this deal. First, the CEO of Tesla, Elon Musk, is going to purchase about 25% of the issued shares. Second, Tesla is doing this at an opportune time, with the shares having surged during the past few months.
A second financing deal was Tesla's plan to raise $450 million in the bond market and use the proceeds to pay off the loan from the U.S. Department of Energy. In fact, yesterday, Tesla announced that it had paid off the remaining balance of $451.8 million. Tesla actually paid this loan off 9 years ahead of schedule, which really speaks to the strides the company has made to turn itself into a profitable machine.
Reason #6: Technical
It's hard to argue with Tesla on a fundamental note, but from a technical perspective, Tesla has vastly outperformed the market over the past year and especially the past 3 months. The stock was beginning to climb into its last earnings report and then immediately soared once its earnings were revealed.
Over the past year, Tesla shares have appreciated by more than 200%. Tesla is the best performing automobile company and one of the best performing stocks in the entire market. Investors may wonder if this is the high, but based on the catalysts and potential in the future, I think this is just the beginning.
As good an investment as Tesla appears to be, the company is certainly not without risk. First, shareholder dilution is certainly a concern. As stated in the financing section, Tesla recently issued an additional 2.7 million shares. It so happened that the stock soared on that news because the market liked the reasoning for that deal. But what happens in the future when the company needs cash for production or to complete a deal? In those cases, it is likely that the share price will fall, just like it would for any other company. And since automobile manufacturing is a cash intensive business, this is certainly a likely possibility.
Secondly, automobile competition is fierce. Tesla faces competition from the usual suspects such as General Motors, Ford (F), Nissan Motor, Toyota Motor Corp (TM), and Honda Motor Corp (HMC). If electrically charged cars gain popularity, which it appears they are based on Tesla's recent sales numbers, all of these companies may begin to make that a focus. This could eat into Tesla's sales numbers and affect profitability. And of course, there is Google. While a partnership on a self driving car would likely be great for both companies, it is possible that both companies have a different vision for the car and decide to go it alone. Google could add significant competition or perhaps lease its technology to another car giant.
As seen in the first couple of paragraphs, Tesla is working on some astonishing things at the moment in attempt to take the company to the next level. Despite the risks that the company faces going forward, based on recent earnings trends, I have to believe that Tesla knows what it is doing and will reward investors over the long term.