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Growth at reasonable price, mutual fund analyst
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Summary

  • Tesla’s plans to manufacture its batteries in-house and selling its cars through an increasing number of dealerships in Europe are expected to improve both its top line and bottom line.
  • With regards to top line, the opportunity is enormous owing to potential international markets. It opened first store in China during 2013 with initial deliveries beginning by spring of 2014.
  • Tesla can diversify its operations by selling batteries to companies such as Apple and Samsung that are fighting to make their products more competitive by any margin possible.
  • The plans announced and the pace at which Tesla is expanding its Supercharger network pushes me to believe that the actual growth could be somewhere near the projected figures.

Tesla Motors Inc.'s (NASDAQ:TSLA) share price has hiked 616% over the year compared to what it began near the $35 range last March. Though this upside is unlikely to continue in the long term, a look at the company's recent performance will provide us with a glimpse at how this return will continue to appreciate at the same momentum at least for the near term.

This is due to the company's plans such as the creation of its own battery factory and selling its cars through an increasing number of dealerships in Europe. These plans are expected to drive profits further. In this article, we will be analyzing the company's potential plans and its recent performance. These plans are likely to be the foundation on which Tesla will drive its future growth.

The Year

Source: 10K

During the year 2013, Tesla's revenue jumped by an unbelievable 386% to $2 billion from a year ago. The company began selling its Model S in Europe last June and that helped it drive growth together with higher deliveries in the North American region. This was insignificantly helped with good powertrain component sales to Toyota that increased 44% from last year's level.

The gross margin improved 730 bps to 22.7% in 2013 though this was partially affected due to comparability issues explained by early-stage cost inefficiencies that arose during the production ramp of Model S from June to December 2012. An important part of the improvement came from manufacturing and supply chain efficiencies, ongoing component cost reductions as well as higher average selling price due to the start of the European Signature Series deliveries in August and a strong mix of 85 kWh battery packs and options in all operating markets.

Research and development reported lower expenses (15%) than the prior year. I anticipated these reductions since 2012 included R&D costs associated with Model S pre-production activities and prototype testing. Now that the product is complete it is likely that these costs will normalize.

Even though higher revenue growth prevailed, the costs still haven't declined to a level where the company could report a profit. Net loss was $74 million or $0.62 per share. However, on a positive note, the company was able to reduce its loss from the previous year by more than 80%. This decline was a continuation of the trend that prevailed prior to the period being compared.

All in all, the year went ahead with successful deliveries in the European region driving revenue growth and cost efficiencies and putting a pressure on losses that declined. Thanks to the future advancements, investors will soon begin seeing a profit in the company's financial statements.

The Future

Internalizing Input Supply is a Great Strategy in an Era of Declining Losses

The company is already reducing its losses so the recent plan to build the Tesla Gigafactory where the company will work together with suppliers to integrate battery precursor materials, cells, modules and battery pack production all in one location will help drive economies of scale in the future when the company's operations have globally expanded.

This factory will create a major reduction in the cost of battery packs of more than 30% on a per kWh basis by the end of the first year of volume production of the company's mass market vehicle, Gen III. In this factory Tesla's focus will be on lithium-ion-batteries that it intends to produce on such a large scale that once the factory is completed in 2020, the plant will be able to out-produce the rest of the world's combined 2013 lithium-ion-battery production (see graph below).

Source: MotleyFool

Speaking of such a high production, there is an element of the company diversifying its operations by selling batteries to companies such as Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) that are fighting to make their products more competitive by any margin possible. In fact, such possibilities have already started showing up with ex Apple executives discussing the likely synergies to be realised if this happens.

Thus, not only will the factory bring bottom line savings but it could become a source of income by bringing top line growth.

Expansion Abroad for Tesla has just Started

With regards to the top line, the opportunity is enormous for Tesla owing to the potential that international markets will provide for Tesla. The company opened its first store in China during 2013 with the initial deliveries to begin spring of 2014. Tesla will make substantial investments in China this year as it adds new stores, service centres, and a Supercharger network in the region. The Beijing store is already the company's largest and most active retail location in the world. With a growing pollution and the conservative nature of the Chinese economy, electric cars are likely to be an attractive product especially in populous cities like Beijing and Shanghai.

Tesla will also open more than 30 new service centres and stores in Europe this year as it anticipates a jump in sales in that region together with Asia. Therefore, I expect the combined sales in Europe and Asia will be almost twice those in North America. The introduction of right-hand-drive versions of the Model S sedan in the UK and leasing and financing programs in Europe will further add to the product appeal by being customized for local preferences. Perhaps this is the reason why Tesla has forecasted a more than 55% growth in global sales this year!

Though, I would hardly place my bets on what the company anticipates, the plans announced and the pace at which Tesla is expanding its Supercharger network pushes me to believe that the actual growth could be somewhere near the projected figure.

Bottom Line

Currently the company isn't generating any profits but that shouldn't dishearten investors because it will soon begin doing so. Building a factory to reduce input costs and a virtually untapped global market means Tesla has a lot of places to acquire growth. This gives me confidence in the company and I believe you should consider owning its stock if you haven't already done so. I conclusively give Tesla a buy rating.

Source: Tesla: A 600% Yearly Return Is Not An Ordinary Occurrence