Tesla Motors’ Growth Potential

By Sebright Chen
Monday, August 11, 2014 11:12 AM EDT

Tesla Motors, Inc. (NASDAQ: TSLA) is an automobile company based in Palo Alto, CA that specializes in the design, development, production and sale of high-performance electric vehicles and electric powertrain components. The company has its own unique sales and operation channel and is the first company to build federally-compliant electric vehicles commercially. Tesla’s major vehicle products include The Tesla Roadster, Model S and Model X.

The company has substantial growth potential. With 31.32 billion market capitalization and a stock price of $261.75, Tesla Motors is the top performer in the automotive industry. Tesla’s proprietary technology in its products and services provides its customers an unbeatable user experience. Those technology innovations also create an extensive patent portfolio for this company. Tesla’s after-sale service programs have built the company a strong brand reputation and groups of loyal consumers. The exclusive manufacture of electric powertrain allows the company to gain partnerships and profits from its industry competitors and companies across industries. Located in Silicon Valley, the company is able to leverage the best engineering and technology resources in the world to keep its reputation as an industry-leading innovator and solve new challenges. The company’s CEO Elon Musk is famous for his vision in making high quality inventions and investments, which is critical to a company’s success.

The Market

The growing need for energy drives the application of alternative energy in the vehicles we drive. As a rising force in the automobile industry, Tesla is doing the right thing by putting significant effort into the safety, quality and services of its vehicles. Its strategic partnerships with Daimler AG (OTCMKTS: DDAIY) and Toyota Motor Corporation (NYSE: TM) have successfully turned those two potential competitors into friends.

Tesla’s vehicles are categorized under “luxury cars” and, for most buyers who are willing to buy luxury cars, safety is usually the top consideration for them. The Tesla Model S is the only model on the market to have received a 10.0/10.0 safety rating from U.S. News and World Report.

Chart 1

* in thousands

Chart 2

High performance electric vehicles are the basis of Tesla’s revenue growth. As we can see in Chart 1, the net sales of vehicles and related products were the biggest contributor to the company’s total sales in 2012, and that figure jumped 451% in 2013, thanks to The Model S, which came out in June 2012.

Tesla started building strategic partnerships with existing industry leaders in 2010, providing electric powertrain products and services to its partners’ vehicles and is still in the expansion stage of this part of its business. Tesla currently holds relationships with Daimler and Toyota, and it also has an agreement with Panasonic Corporation (OTCMKTS: PCRFY) under which Panasonic provides Tesla with battery cells. According to the company’s Q2 results this year, its powertrain components sales increased 12.96% compare to Q2 2013. As more and more automobile manufacturers jump into electric vehicles and customers’ preferences switch from traditional gasoline cars to electric cars, Tesla’s partnership program will become a winning advantage for this company in the next generation of vehicle market competition.

Chart 3

Until Q2 2014, Tesla’s gross profit margin was 27.69%, 16.1% higher than the industry’s average gross margin in Q2 2014, which tells us Tesla Motors is being efficient among its industry competitors.

Positives

The company has a strong management team and its CEO is well known for his business vision. Tesla’s competitive salary packages attract and will continue to attract high levels of talent to the company to contribute to the new generation of vehicles and related products and services. The Tesla series electric vehicles are convenient, comfortable and stylish. They are not only luxury but also eco and price friendly. The world-class warranty and services they offer bring the company positive feedback and loyal customers. Its Model S’s success helps boost the company’s revenues and support the prototypes for future models. Powered by electricity, the Tesla vehicles are able to be fueled with a charger anywhere with an outlet.

Negatives

The current administrative and operations costs are high. Tesla’s powertrain components partnership program needs to reach a new level, and the fact that the current battery can only last up to 265 miles per charge means there is still room for improvement.

Tesla Motors, Inc. is still in its development stage. Investing heavily in R&D at this point is inevitable and necessary for the company’s future growth, hence it is normal for the company to have negative earnings during this period. Yes, the charging process currently takes a long time, but that does not mean this process cannot be reduced in the future. Just like the evolution of smartphone, the charging process will become shorter and the battery will last longer; technology makes this happen. The exceptional location advantage of the company gives Tesla Motors the necessary technology resources it will need to succeed.

With a current stock price of $261.75, the company still has substantial growth potential and I like its potential as an investment.

Disclosure: None.

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Comments

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Sebright Chen • 9 years ago • Contributor's comment
Hi Moon, thanks for your comments. Yes, you’d want to expect some time to see the company’s growth. I didn't say "electric cars are new and novel", only expressed it would be a trend for the future. Yes, it was first developed about a decade ago, it means the context and technology, and even people's concepts about electric power at that time are not mature enough, which means this particular technology cannot be adapted at that time. Also, the players back in a decade ago were different, they failed in bring this idea to an opportunity, that does not mean Tesla need to do the same. Right now the context and players have changed. Was iPhone 1 a huge success back in 2007? The market and customers need time to accept new concepts so that the product could cross the chasm. As for the battery, yes, I've stated the battery need improvements in my writing, that's the weakness. Does that mean the company must keep using the outdated battery technology for the next generation? Of course not. That's why I mentioned the company's location. Silicon Valley's strong engineer forces would allow the company to keep their battery technology up to date. As for the price, I expressed the company's earning is one negative element, what caused its negative earnings? Invested heavily in R&D to ensure the quality of the products and complementary services to make sure customer experiences - which are so critical for a company under its development stage - good feedback from early customers will build the company's brand and eventually help the company cross the chasm. Brand is such an important intangible asset for companies like Tesla. When you buy a car, will you choose a well-known name with great feedback or a brand name you never heard of? Those are the fundamentals for a company’s success. Stock price itself is not enough to value a company, companies like Google, its stock price is extensively high and does not reflect its earnings if you do a calculation, does that affect Google’s continuing growth? At least I didn’t see any. Companies like Facebook, its earnings obviously cannot support its current stock price, but the stock price is still rising. Why? Its products and markets make it happen.
Ilene Carrie • 9 years ago • Contributor's comment
Moon, are there any other companies that are more reasonably valued that you like for betting on the future of electric cars? Thanks.
Moon Kil Woong • 9 years ago • Contributor's comment
I do not see Tesla in the same light. The founder is famous for making bats with taxpayer money and Tesla is not alone in that. Also he is seeking high speed transportation grants from the government to make another taxpayer led bet. This is fundamentally due to 3 things. First, Tesla's price puts its capitalization astoundingly high and even it's CEO has stated his doubts about its price. Second, Tesla broke ties with the government loans due to their inability to keep to the sustainability requirements set out in them. Which leads me to the third concern: In order for Tesla to stay viable they need to invest heavily in battery plants using their outdated battery technology. Given the speed of technology change and the fact massive battery plants will take decades to depreciate, betting on Tesla today is essentially as risky bet as before it made headlines with its cars. You may win, but don't expect massive appreciation anytime soon. In the meantime, competition is on its way. As for arguments that electric cars are new and novel, please look at your history. Electric cars were around decades ago. Technology is what makes them viable versus gas powered cars, and technology is advancing rapidly. Tesla must spend its profit keeping up with the curve because the car majors are coming in. Technology will make or break Tesla. It is way too early to tell its long term success. My guess is it will eventually hit the skids and be bought up by a major car company, but certainly not at the current market prices that set Tesla as expensive as other car companies with pitiful revenue and profitability compared to their rivals.