Tesla Motors (TSLA), a pure player on electric cars, reported its second-quarter earnings yesterday after the market closed. The company beat earnings by 4%, however, it missed revenue by 14%, as it has halted its sales of the Electric Car Roadster in the U.S., after introducing its popular Model S in the market in June of this year.
The company has maintained its 2012 outlook, despite downward revisions from Wall Street. The company expects $560 million-$600 million sales this year, around 15% more than analyst estimates of $480 million.
With favorable reviews for the Model S, an increase in its demand from 11,500 to 12,200 units in just 15 days, plans of expanding production facilities, availability of easy credit to tackle negative cash flows, a more bullish management, and its expectation of breaking even cash flows by the end of the fourth quarter, TSLA seems an attractive opportunity to buy. Sell-side experts also expect the electric car producer to make profits by 2013.
This quarter, TSLA's loss widened from 60 cents/share to 89 cents/share (adjusted). Still, this was better than expectations. The stock, however, plunged 2% as the company missed revenue by 14%, which was 54% down YoY. Moreover, the management maintained its guidance at the same levels for revenue for the year.
Model S and Way Forward
The management has taken a bullish stance on its Model S, as it announced its plans to ramp up production, and claimed that this increase does not require significant capital. The Model S is extremely crucial for the company's performance, as TSLA expects 90% of its revenue to come from the sale of this model this year.
Model S has received favorable reviews from the market. Some even state it to be a direct competitor to luxury sedans like Lamborghini, rather than other electric cars. There is no doubting the fact that the car is made from state-of-the-art technology, and no other electric car gives a range above 100 miles in one full charge. The Model S gives a 160-300 miles range depending upon its different variations. The sedan is a lot smoother and quieter in speeds above 100mph, compared with other cars. Moreover, the high quality powertrain and battery packs installed in it give the car a competitive advantage over its competitors such as the Nissan (NSANF.PK) Leaf and the GM (GM) Chevy Volt. TSLA's powertrains are so famous, that even Toyota (TM) and Daimler AG (DDAIF.PK) get the part made from the company so that they can install powertrains in their RAV4s and Smart Electric Drive respectively.
One of the problems often cited by the users of electric cars is the concern regarding the charging of cars. The electric car players are coming up with different solutions to this problem. In this regard, TSLA has announced that it will introduce a super charger that can charge electric cars in less than an hour, taking almost 75% less time than a normal charger.
Investors were told in the earnings call conference that the orders of the Model S have gone up from 11,500 units to 12,200 in just 15 days. This addresses the concerns about the demand for the car.
The company is currently producing 10-11 Model S cars per week, and it has decided to produce nearly 500 cars in the next quarter, and then radically increase the production rate to reach a target of producing 5,000 units this year. The company expects demand to rise this year, and plans to manufacture 20,000 units in 2013. The company also intends to introduce the Model X and the Gen III in the next couple of years, which can help generate incremental revenue for TSLA.
From a macroeconomic point of view, the demand for electric cars is expected to rise, as the global GDP improves and oil prices shoot up. Also, the U.S. government is currently offering an incentive of $7,500 rebate per electric car purchased. The U.S. Energy Department also issues cheap loans to companies backing measures of energy efficiency. Tesla has already received $400 million worth of loans. U.S. auto sales are also rising, as depicted by the Seasonally Adjusted Annual Selling Rate (SAAR). All these facts give a positive outlook for TSLA.
Bears assume that the company is facing hard times in tackling its debt and interest payments, as it is burning through its cash right now. However, this is not the case, as the company has strong backing from the U.S. Energy Department till it starts making positive earnings in 2013. Also, the company claimed to break even its free cash flows by the end of this year's fourth quarter.
The earnings pattern tells us that the company is expected to start making positive earnings in 2013. Trading at a forward multiple of 48x, using the 2015 earnings the stock is expected to trade at $50, which means an upside of more than 100%.
TSLA enjoys great credibility amongst its investors, as it has managed to be on target almost every time for any announcement that it makes. Therefore, as the company produces and sells more of the Model S, and improves its liquidity position, the stock is expected to rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.