Tesla (NASDAQ: TSLA) is proving to be the little company that could, as great reviews for its only product, the high-end electric car Model S, along with its first-ever profitable quarter, helped send stock prices soaring. Forward-thinking investors who got hold of TSLA stock early are smiling ear-to-ear even as others are wondering if it is too late for them to get in on the action. Some analysts, however, are wondering if the stock is overvalued and if it's time for smart shareholders to take profit.
Tesla's Great Month
May is proving to be a great month for Tesla, as it enjoyed one piece of good news after another. In late April, the company announced its first-ever profit of $11.2 million for the first quarter of 2013. The release sent stock prices soaring more than 120% from its April 1 closing price of $43.93 to $98 as of May 24. On May 10, Consumer Reports, whose reviews are some of the most closely-watched in the automotive industry, gave Tesla's Model S a 99% score, calling it the best car they've tested since 2007. To cap it all off, on May 14 it was reported that Tesla was worth more than venerable Italian carmaker Fiat.
With all this good news, it should not be surprising that Tesla chose to take advantage of it to make a $313 million secondary stock offering, as well as a convertible note offering of $600 million, in order to generate cash to pay its outstanding loans to the Department of Energy as well as for general corporate purposes. And in an unprecedented show of confidence, Tesla's CEO Elon Musk said he would personally buy $100 million of the stock through the share offering as well as a private placement. The bulk of the raise would be used to retire the $465 million in loans the company received from the DOE's Advanced Technology Vehicle Manufacturing Program, which were due in 2017. Ultimately, Tesla generated over a billion dollars from the stock offering.
For the rest of the year, Tesla announced that it plans to ramp up production of the Model S, with some 4,500 units planned to be delivered in the second quarter and 21,000 overall for the entire year. With the ramped-up production, the company hopes to end the year with a total gross margin of 25%; for the first quarter alone, gross margin was 17 percent. For the first three months, Tesla sold 4,900 units of its Model S, more than traditional luxury cars like the Audi A8 and the BMW 7 series. It also outsold rival electric cars such as the Chevrolet Volt, which sold some 4,244 units, and the Nissan Leaf, 3,539 units.
Profitability: The Next Challenge
The next challenge for Tesla is to prove that it can be consistently profitable just by selling cars alone. Its first quarter 2013 profitability was partly driven by Tesla's selling of zero emission vehicle credits to other car makers, which accounted for some 12% of revenues, or $68 million. Without this revenue, the company would actually have reported a loss. However, it is worth noting that the company reported that its total gross margin for the quarter was 17%, and it expects to end the year with a gross margin of 25% entirely through automotive sales and not through ZEV credits.
One problem facing the company is the high cost of its vehicles. The Model S retails for more than $100,000, or $70,000 after tax credits. While plans are underway to create a mass market version of the electric car, which goes some 230 miles to 300 miles on a single charge depending on battery size, these are still three to four years away. The proposed model currently has no name but is expected to be a mid-range, lower-priced vehicle that would retail for around half the price of a Model S and is expected to be released no later than 2017. Tesla also plans to release a Model X SUV in 2014. Meanwhile, it has to fend off competition from other car makers producing plug in cars, which could hurt its volume sales. In early 2014, GM plans to roll out its Cadillac ELR, a luxury electric coupe with an extended range which could retail for around $60,000.
The Bottom Line
Although the outlook for Tesla is optimistic, it remains to be seen whether it can remain consistently profitable going forward. The market for electric cars is sure to become more competitive as gas prices continue their inevitable rise. However, the car maker's huge stash of cash will help it stay viable as well as giving it the means to develop new models.
It should be noted that not all investors believe that Tesla stock price will continue to appreciate on long-term growth, as some 37% of its free float is still sold short. However, the general consensus on Tesla stock remains a buy and a hold as, barring any catastrophic developments, the stock will continue to grow in value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.