Tesla (TSLA) is the stock that everybody loves to hate. When a stock is up 400% in a year, it naturally becomes a target for shorts, especially when the bottom line numbers can't mathematically justify the rally. It's common when there's haste to bet against a high-flier like Tesla to make mistakes and float around myths. Not surprising, there's over $3 billion worth of short positions outstanding. This article hopes to clear a few of them up, following my article Tesla's Path To A Conservative $500 Per Share.
Myth #1: Tesla's profit margins are only a result of the federal zero emission credit.
Reality: CEO Elon Musk gives his 25% target. From the last conference call:
"We see clearly a path that gets us to 25% excluding ZEV credits given the actions that are underway and have been underway for awhile."
Some bears will claim Tesla doesn't have 25% margins "yet." However, we are now knee deep in the fourth quarter which is the quarter of the predicted 25%+ margins excluding ZEV credits. I think a better and more realistic way to phrase it is 25% margins haven't been reported yet. Would anybody be surprised by 25% margins with the third-quarter report? Either way, 25% margins are almost certainly being realized as you read this.
Reality: From the CC:
"Further execution on our cost reduction roadmap is expected to continue to improve non-GAAP automotive gross margin to our target level of 25% (excluding ZEV credits) in Q4 this year. We are cautiously optimistic that a number above that level may be achievable in future quarters."
Automotive margins and future quarters (plural) implies beyond the Model S. There is nothing in Tesla's publicly available information that suggests future models will have worse margins. Furthermore, a cheaper model doesn't automatically mean cheaper margins. There are lower input costs for lower model prices. While it's true that nobody knows the future, the one piece of information we do have is the company forecast, and that forecast clearly calls for "a number above" 25% on "automotive" gross margin. Not just one model.
Myth #3: Tesla doesn't have the money to expand capacity.
Reality: Tesla is spending (or spent?) $150 million on capacity expansion in second-half 2013 alone. All of this money is expected to come from cash flow generation and double production capacity. From the CC:
"As we said in the shareholder letter that we clearly intend to get cash flow from operations. And you are right in pointing out that some of that will be offset by our capital expenditures and we want to be very careful about burning cash. We want to be sure we are close as possible to a free cash flow position, but that's something that we don't want to necessarily guide to how we are going to manage it, but we are going to be still judicious and spend the CapEx where we need to in order to make sure that we are growing at the right pace."
Tesla expects to be at double production by end of next year.
All this said, I admit the bears have two points. One, there's no such thing as 100% chance of success. Not only is there no such thing as 100% success with any stock, but Tesla's stock price has already built in some degree of great success that Tesla must achieve just to sustain it. Second, my $500+ target is years away. Even if it hits, and I actually think it will go beyond that, there's a "cost" to have to wait for that 200% gain. So what's the time frame on $500 per share? I left it out because I don't know. Tesla didn't give a target time frame that I know of for its 500,000 vehicle production target so it's hard for me to put a time frame target on that. It's probably at least 4 or 5 years away.
Shorts should bear something in mind, however. If Tesla hits 500,000 cars in production in sales, then the valuation numbers-geeks like myself will be looking at production and sales much larger in the future beyond 500,000. There will be no doubters left at that point, even if the margins come in at less than expected levels. If Tesla can make and sell 500,000 cars in a year, everybody at that point will expect that it can and will sell much more than that. The PE expansion won't be the 12 level I used. It will be multiples higher.
Still disagree? Comment below!