Tesla: Strong Quarter, But Investors Feel Like They Need More Details

| About: Tesla Motors (TSLA)


Tesla posted pretty strong results for the last quarter.

The costs are going higher as the company ramps up production.

Many investors are left confused about giga-factory details.

Tesla will have to work hard and keep delivering strong results to keep its valuation.

Tesla's (NASDAQ:TSLA) quarterly results are just in and they look pretty good overall. The company produced 7,535 Model S vehicles and delivered a total of 6,457 vehicles, both above analyst expectations. The company generated $620 million in revenues, $17 million in non-GAAP income and it reported a loss of $50 million in GAAP figures.

Tesla announced that it is on its way to meet or exceed 35,000 deliveries for the full-year of 2014, which is in line with the previous guidance. The last quarter's 7,535 vehicles correspond to an average weekly production rate of 627 and the full-year guidance corresponds to a weekly production rate of 700 (considering a 50-week year due to the exclusion of the winter holiday). Tesla is increasing its capacity further in order to deliver as many Model S vehicles as it can while preparing the factory for the introduction of Model X.

Without giving specific figures, Tesla announced an increase in demand and new orders. During the last month, a lot of debating has occurred about the ongoing demand when Tesla decided to send 1,500 vehicles in Norway where there is a lot of demand for the Model S due to the generous tax policies of the government. A lot of bears took this as a sign of slowing demand elsewhere. A lot of bears see Norway as an outlier and argue that the demand in Norway cannot be generalized to elsewhere in the world where conditions are not the same. Speaking of the demand, Tesla's "customer deposits" increased from $163 million to $198 million during the quarter but we have no way of knowing the proportion of Model X reservations within this figure.

Between last quarter and this quarter, Tesla's cash increased from $846 million to $2.39 billion while the company's long-term debt increased from $846 million to $2.39 billion. A big chunk of Tesla's cash will be put aside to be spent on the new giga-factory. Tesla generated $60.64 million from its operations, down from last quarter's $129.76 million but slightly up from last year's $64.07 million. During this quarter, Tesla spent $329 million on factory upgrades, supercharger network installations and other investing activities and this represents a huge increase from last quarter's $89 million.

Tesla's diluted share count is now 140.22 million, up from last quarter's 137.78 million and last year's 124.26 million. The increase was mostly due to stock-based compensation and convertible debt obligations.

Tesla plans on producing 8,500-9,000 vehicles in the second quarter while delivering 7,500 of these cars. Since these cars spend a lot of time in transit, there will be a discrepancy between the number of cars that are produced and the number of cars that are delivered to Europe and Asia. Then again, the same thing should also be true for the previous quarter. For example, if it takes Tesla one month to transit a car from its factory to Europe/Asia, the cars that are being built towards the end of the quarter should be delivered in the beginning of the next quarter. Last quarter, Tesla built 7,500 cars and delivered 6,500 cars which means that there are about 1,000 cars that were built last quarter but will be delivered sometime this quarter. If Tesla will build another 8,500 cars and deliver 7,500 cars during this quarter, it may be only delivering 6,500 of the cars that are being built this quarter.

Tesla expects its R&D costs to increase by 30% and SG&A costs to increase by 15% during the second quarter while the company's revenues will be rising about 15%. Tesla's gross margin is expected to improve slightly but the company's operating margin is expected to see a decline. Compared to the same quarter a year ago, Tesla's operating expenses are up by nearly 100% (up from $102 million to $199 million). As a result, Tesla's operating loss jumped from roughly $5 million to roughly $44 million.

I didn't really see a sign of declining demand for Tesla's vehicles. I am not saying whether the demand is declining or not, I am rather saying that I don't see evidence of such decline. In the last 4 quarters, Tesla generated $2.07 billion in revenues and we are looking at revenue of $14.7 per share according to a diluted share count of 140 million. At $200 per share, Tesla would be trading at 13-14 times its revenue.

Many investors and analysts were hoping to hear more details about Tesla's launch in China, especially some idea about the demand in the country but Tesla did not provide much in terms of details. China has a large number of people who can afford Tesla and the country's new movement towards cleaner energy gives Tesla a lot of hopes; however, bears pointed out that many of China's millionaires wouldn't be able to use a Tesla since they live in apartments rather than houses with garages and one needs a garage to charge a Tesla vehicle. There were a lot of speculations about the demand in China and these speculations might continue on for a while.

Tesla has been in a sell-off mode for the last few weeks and this trend did not come to an end in the after-hours. Obviously the investors were looking for a blowout quarter with many surprises but it didn't happen. Elon Musk has surprised people so many times that if it doesn't happen, people feel like something must be horribly wrong. Of course lack of surprise is not the only reason for a sell-off either. Recently, as the quantitative easing is getting scaled down, a lot of the momentum stocks have been falling sharply because they kept feeding from the Fed's overly generous policy. When the market gets hit, momentum stocks get hit the worst because they enjoy the highest valuations when things are going well. Does that mean the investors will focus more on Tesla's fundamental valuation from now on? It is likely but I don't even think the market has figured out a way to value Tesla properly yet.

A lot of people were also thrown off by the developments surrounding the giga-factory. It sounded like there will be two giga-factories or two separate constructions one of which will become a giga-factory. It was also confusing to hear that Panasonic "agreed to talk about agreement" with Tesla about becoming partners in the factory. More importantly, we were told that giga-factory's construction will start as early as next month even though the negotiations with Panasonic still seem to be in the early stages. I am sure there are a lot of multi-level negotiations going on as we speak (between Tesla and Panasonic as well as between Tesla and several states) and it will be interesting to see how things work out at the end. I am not even talking about the Model X, which is now pushed back to 2015. I bet a lot of investors are wondering what exactly is going on behind the scenes.

Overall, Tesla had a strong quarter and the growth story still seems intact even though we spot a few speed bumps here and there. The investors expect a lot from Tesla evidenced by its generous valuation and only time will tell how much the company can deliver. So far, things have been looking good.

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.