Tesla's Growth Is Exciting

| About: Tesla Motors (TSLA)

Electric vehicle maker Tesla (NASDAQ:TSLA) continues to be one of the more interesting stories in the broader stock market. Without spending a dime on marketing, the firm posted record revenue of $562 million, smashing consensus estimates. Earnings per share turned positive at $0.12, which was also far better than consensus expectations. To top it off, Tesla posted positive free cash flow of $6.3 million-not much, but certainly a step in the right direction.

During the first quarter, the company produced over 5,000 cars and recognized revenue on 4,900 units, easily exceeding the company's initial guidance of 4,500 units. Demand remains brisk, and CEO Elon Musk noted in his letter to investors that current order demand is exceeding 20,000 units per year globally. Again, this is without spending any money to market the vehicle, which speaks to the satisfaction current customers have and the intrigue associated with the brand.

Competitors such as Toyota (NYSE:TM), Ford (NYSE:F), and GM (NYSE:GM) spend hundreds of millions of dollars on advertising - a stark contrast from Tesla. Strong brand momentum, coupled with a growing serviceable market thanks to the company's financing partnership lead us to believe Tesla has room to substantially increase its sales. Although competitors will likely catch up as far as electric vehicle production goes, the firm has a solid lead at this time.

On the cost side of the equation, better inventory management, production cost leverage, and lower raw material costs resulted in the firm's gross margin more than doubling sequentially to 17%. Tesla believes it will be able to achieve 25% gross margins without the benefit of zero emission vehicle credits (ZEV) sold to other auto OEMs. We think production leverage combined with better manufacturing efficiency makes the goal attainable.

Research & Development costs declined 23% from the previous quarter to $47 million on a non-GAAP basis. Musk acknowledged the difficulty of adding such full-scale production in a relatively short amount of time, but the firm looks better positioned to handle incremental capacity increases, in our view. SG&A was marginally higher quarter-over-quarter at $41 million on a non-GAAP basis, attributable mostly to the increase in store and network infrastructure expenses. We anticipate these figures to stay elevated while the firm remains in a rapid growth phase.

Looking ahead, the firm boosted its full-year unit shipment range to 21,000 from its aforementioned 20,000 range. Some vehicles being shipped to Europe ahead of a third-quarter launch will provide a slight drag on units delivered during the second quarter, but that fact is immaterial to the company's overall performance.

It is easy to fall in love with the Tesla story - the firm has entered an unbelievably competitive market and established itself as a profitable competitor. The Model S is by all accounts a fantastic automobile. Although its sales remain a tiny fraction of those we see at the world's largest automakers, Tesla could continue to expand its market presence, or perhaps even be swallowed by a larger competitor. Since its workforce is non-union, it's hard to imagine any company aside from current investor Toyota or a dark horse like Google (NASDAQ:GOOG) making an offer.

Still, we aren't letting the excitement of Tesla's first-quarter results get ahead of us. While we intend to review our valuation, the firm trades at a significant premium to its peers-which is justified-but more importantly, is still in its infancy. Tesla could become a significant global player in automotive, or it may be relegated to a smaller set of higher-income customers. Current elevated gas prices certainly tip the cost benefit in favor of electric vehicles, though the transition could take several decades to complete. Further dilution is also a risk as the firm's shares outstanding has increased 18% during the past year. Regardless, we won't be chasing the firm for addition to the Valuentum Best Ideas portfolio after the tremendous rally.

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.

Additional disclosure: F is included in the portfolio of our Best Ideas Newsletter.

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