With shares up more than 400%, it's safe to say that Tesla Motors, Inc. (NASDAQ:TSLA) has had strong momentum on its side over the last twelve months. The company has repeatedly driven short-sellers crazy by continuing to rally higher after nearly every newsworthy event. The only exception to this is a short period in October when shares of Tesla had dropped over potential Tesla Model S fire concerns (these concerns were later discredited).
Founded over a decade ago, Tesla is by no means your traditional automobile manufacturer. In fact, Tesla shares appear to be valued more as a high-tech company than your typical car company. The reason for this is simple; Tesla Motors is currently centered as a cutting-edge provider of high performance electric vehicles. The company is at the forefront of the growing shift towards mass-market adoption of electric vehicles. In fact, in the eyes of many, electric vehicles are starting to become a practical alternative to the traditional gas-powered or hybrid automobile.
As is apparent in this blog post from late 2006, current Tesla CEO Elon Musk had begun to plan his current vision for Tesla Motors more than seven years ago. In Tesla's early years, Musk had been the primary funding source behind the company. He had also served as one of the primary thought leaders behind the company's long term corporate strategy. As noted in his blog post, Musk believed that the only way to create a sustainable solution to the carbon emission nightmare of traditional vehicles was to create an electric vehicle that was not only energy efficient, but also elegantly designed for both speed and beauty. He believed that electric cars would ultimately need to become more affordable if they were to ever attain mainstream acceptance.
Musk's vision to create a range of affordable-priced family cars is only beginning to look realistic, and a great number of years will still likely pass before his complete vision has been realized. However, the key to this story is that Musk has stayed true to his original vision and has proven himself to be a strong business operator in the process.
Recent Earnings Report:
In its recent earnings report after market close on February 19th, Tesla delivered strong earnings results which helped shares to reach new all-time highs. The company had handily beaten both analyst earnings and revenue expectations. This positive earnings/revenue surprise was complemented with a rosy guidance including a projected increase in 2014 Model S sales of more than 55%. During the earnings call, Tesla management also announced their expectations for an increase in automotive margins to 28%.
According to the Q4 2013 report, Tesla had sold nearly 6,900 Tesla Model S Vehicles over the fourth quarter of 2013. This, combined with other sources of revenue, allowed the company to generate GAAP quarterly revenue of $615 million and Non-GAAP revenue of $761 million (compared to analyst expectations of $686 million in revenue). The company also delivered EPS of $0.33 which compared to analyst expectations of $0.21 for the quarter.
Tesla CEO Elon Musk is undoubtedly a gifted leader and operator. In fact, many have even gone so far as to compare him to the likes of the now-deceased former Apple (NASDAQ:AAPL) CEO Steve Jobs. The similarities between Musk and Jobs are numerous. Both possessed strong visions as well as the marketing and operational prowess needed to execute upon those visions (a truly remarkable combination). Both were serial entrepreneurs credited with disrupting multiple industries and focused on "design thinking". Jobs introduced the world to iPods, iPhones, iPads, iCloud, and many other beautifully-designed products. Musk, on the other hand, founded and worked at several revolutionary companies including SpaceX, Tesla, and Pay Pal.
Diluted Shares Outstanding
Net Income Growth
Adapted from Marketwatch.com
As is apparent in the above financial history for Tesla, the company has rapidly increased revenue over last five years. However, it is also important to note that the company has failed to translate this revenue into positive net income during the period from 2008-2012. Tesla has only recently broke away from this trend and generated a positive free cash flow during the last two quarters of the 2013 fiscal year (Tesla generated $40 million in free cash flow in the most recent quarter). This is a positive sign for the company as free-cash flow is the life-blood of any business. Without it, a company would eventually find itself bankrupt.
The Future for Tesla:
In its recent earnings report, Tesla made it evident that the company has been consistently growing its earnings and steadily narrowing its recurring net operating loss. In the fourth quarter of 2013, the company boasted an operating loss of only $16.3 million compared to a loss of $89.9 million in the year earlier quarter. This operating loss should continue to decline even further as production volume increases and as Tesla continues to implement its cost-reduction initiative for its currently expensive electric-car batteries. According to Craig Irwin of Wedbush Securities:
Tesla has the ability to dramatically reduce the cost of the battery by almost half in roughly the next three to five years.
In addition to its margin improvement and cost-reduction initiatives, Tesla is also currently working on several new products, including the company's third generation Model E and its planned Tesla Model X crossover vehicle (anticipated to launch later this year). These new Tesla models could potentially serve to fuel the Tesla growth story going forward and will likely play a significant role in the near-term share performance of Tesla.
Despite these potential catalysts, it is still important to note that the market has already priced in much of the future expectations for Tesla into its current share price. The company is already being valued for disruptive growth, so if this anticipated growth does not eventually occur, it will most likely spell catastrophe for the share price of the company. For this reason, I doubt that we will see anywhere near the same degree of appreciation that we have seen in Tesla shares over the last year.
At its current growth trajectory, future projections, and premium valuation, any sign of slowing growth will likely lead to a sharp pullback in shares of Tesla Motors. For this reason, despite the strengths of the company including strong management/leadership and expanding revenues, I would rate TSLA shares as neutral, assuming that the company will continue to meet investor growth expectations.