Even though Tesla (TSLA) made an early announcement to tell its investors that it sold 6,900 units of Model S vehicles (and beat its revenue guidance by 20%) during the fourth quarter of 2013, there are still several items investors should be looking for in the company's earnings announcement that is due next week. These are seven items that will determine whether Tesla's rally will continue on or slow down (or even reverse) in the coming weeks.
Guidance for 2014: Of course, the most important item for the investors will be the company's guidance for the full year of 2014. So far, Tesla has delivered more than 25,000 units of Model S vehicles and the company is expected to deliver anywhere between 30,000 and 40,000 vehicles during the year of 2014. Since the launch of Model X was delayed, Tesla will have to rely completely on sales of Model S during this year. If Tesla can keep its production growth rate constant, it will be able to deliver 650 vehicles per week in the first quarter, 675 vehicles per week in the second quarter, 700 vehicles per week in the third quarter and 725 vehicles per week in the fourth quarter. Considering that Tesla produces and delivers vehicles for 50 weeks out of a year, we can expect the company to deliver about 32,000 vehicles in 2014, which would indicate a growth rate of about 50% from 2013's numbers. More liberal assumptions would give us higher estimates.
Deposits: I am really curious to find out about the deposit situation of Tesla. As of last quarter, Tesla had $140.28 million in its balance sheet under "Customer Deposits." Since the company delivered 6,900 vehicles during the quarter and it collects $2,500 in deposits from each Model S reservation, this would reduce the amount of by $17.25 excluding any new deposits that were made in the last quarter. While it will not be a perfect indicator, the company's deposits will be able to tell us a lot about the company's current demand and current backlog. It will be very interesting to see how much customer deposits grew since last quarter.
Float/Dilution: As of last quarter, Tesla had sold millions of shares of warrants, convertible debt and stock options to a variety of sources including but not limited to its employees. Some of these warrants and options will be exercised and some of the debt will be converted over time and this will increase the dilution by a certain amount. In addition, Tesla might also have plans to issue more shares in order to fund its growth as well as a "giga-factory" for battery production. Investors will be watching closely whether their shares will be exposed to any meaningful dilution in the coming quarters. As of the end of last quarter, Tesla had 121.86 million diluted shares, up from 105.56 million in the same quarter a year ago. As of last quarter, Tesla had about 25 million stock options outstanding and I would expect about 3-4 million option-exercising per quarter.
Cash position: During the quarter, Tesla spent cash on increasing its network of superchargers, introducing stores in Asia and increasing its production capacity. These are all great investments by the company in order to ensure future growth. It will be interesting to see how Tesla's cash position is holding up though. As of last quarter, the company had $795 million of cash on its balance sheet and it will be a great accomplishment for Tesla to keep most of this cash intact. If the company's cash position fell by a lot, this could indicate that it needs to take on debt or issue more shares. So far, Tesla has used its cash very conservatively and I expect this practice to continue as we move forward.
Cash flow from operating activities: This is actually one of the most important metrics that the investors need to be watching in this quarter's earnings. This pretty much determines whether Tesla can generate enough cash from selling cars or not. In the first nine months of 2013, Tesla generated $128 million of cash flow from its operations, which is a huge improvement over 2012's negative $229 million and this cash helps the company invest into growth in the future.
Operating expenses: In the shareholder letter for the third quarter of 2013, Tesla acknowledged that its operating expenses will rise sharply in the fourth quarter as the company's R&D and administrative expenses would increase in double-digits from quarter-to-quarter: "R&D expenses are expected to increase sequentially by about 25% in Q4 as we accelerate product development efforts on Model X and Model S enhancements. SG&A expenses are expected to rise sequentially by about 20%, driven by the growth in our retail locations, service centers and Supercharger facilities." It will be very interesting to see if Tesla can beat this estimate by having lower operating expenses. This can tell us a lot about future profitability of the company. The company's operating margins are a lot more important than its gross margins even though the entire investment community keeps talking about gross margins all the time while ignoring the importance of operating margins. At the end of the day, operating margins determine whether a company will be profitable or not (ask J.C. Penney and RadioShack about their gross margins of 30%).
Updates on the Giga-Factory: I will also be looking forward to hear an update on Tesla's plan of building a giga-factory for its future battery needs. Particularly, I am interested in finding out whether Tesla came up with a funding plan for the factory and I am definitely hoping to hear a timeline estimate. A positive surprise about the giga-factory can get Tesla's shares flying above $200. I would also like to hear more about the Model E. Did Tesla finally come up with a prototype? If not, when can we expect to see a prototype for this car? Many analysts and investors who are skeptical on Tesla claim that the company can't actually build a $40,000 car with 200+ mile range while making a profit on it. If Tesla can show us that it is taking the right steps towards accomplishing this, many bearish investors will start changing their minds.
The seven items listed above will tell us so much about where Tesla is headed both in the short term and long term. I am excited to hear from Tesla next week.
Additional disclosure: I'm long both calls and puts of TSLA.