3 Bold Bets for Tesla Motors in 2014

Model S

Looking back, 2013 was Tesla's (NASDAQ: TSLA  ) miracle year. Not only did the stock soar 350%, the Model S also blew away everyone's expectations. Not only did sales surprise, but the Model S also accumulated an impressive list of accolades. With the stakes so high, will Tesla be able to impress in 2014? Here are three bold bets.

Tesla will achieve a gross profit margin of 29%
Wait -- Ford only has a gross profit margin of 15.5%. How could this young auto manufacturer achieve a gross profit margin for its automotive business that is so much higher?

It starts with an impressive average selling price, or ASP. Tesla's Model S deliveries may begin at $69,900, but thanks to two enhanced models and a number of optional add-ons, the average selling price for Tesla's Model S is actually $109,600 (using non-GAAP revenue).

Next, a few other factors come into play to help Tesla achieve such an impressive gross profit margin. First, Tesla is only producing one model (the Model X  isn't expected to launch until the end of 2014, and in limited quantity). Second, rapidly expanding production will significantly boost Tesla's scale.

Already, Tesla has achieved a gross margin of 21% for its automotive business in Q3 (based on non-GAAP revenue, excluding zero emission vehicle credits). That's up substantially from the previous quarters -- 14% and 5% in Q2 and Q1, respectively. And Tesla believes 25% and beyond is within reach: "While we expect to achieve our target of 25% non-GAAP automotive gross margin in Q4 (assuming no contribution from ZEV credits), further progress is likely ..."

Competition will launch a fully electric competitor to the Model S
The Model S was a blockbuster success. Competitors won't sit around lethargically very long. While competitors have launched hybrids to compete with Tesla's luxury car, no manufacturer has yet launched a fully electric car with meaningful range.

Indeed, General Motors has already expressed interest in developing an electric car with range of up to 200 miles, according to The Wall Street Journal. Tesla is on pace to sell 21,500 vehicles, so you can bet General Motors isn't the only one considering an all-electric model to get a slice of this fast-growing market.

Tesla's demand will continue to outstrip supply
Word of mouth is all Tesla needs to sell its vehicles, apparently. Demand for the vehicle continues to outstrip supply, despite no discounts and no advertising. While Tesla is boosting production, it is also expanding rapidly into many countries in Europe and even China, both moves that will lead to greater demand. And a rapidly growing network of Superchargers will certainly help demand, too.

A good year for Tesla?
While two of these three bets are undoubtedly positive developments for Tesla, a competing vehicle could create challenges for the company. Or would it? Tesla CEO Elon Musk told CNN Money earlier this year that he would welcome competition: "I hope we are surrounded my electric cars from other manufacturers." The adoption of fully electric cars with meaningful range by competitors would accelerate the advent of sustainable transportation by electric car. And that's Tesla's mission, after all.

Of course it's tough to talk about Tesla's business prospects in 2014 without also mentioning its lofty stock price. At 10 times sales, massive margins and healthy supply are already priced into the stock. But the fact that predictions like these can even be made today shows just how far Tesla has come in the last year. Perhaps Tesla could exceed the market's expectations yet again in 2014.

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Comments from our Foolish Readers

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  • Report this Comment On January 01, 2014, at 11:37 AM, Ustauber wrote:

    Thx TSLA

  • Report this Comment On January 01, 2014, at 12:02 PM, JouniValkonen wrote:

    There won't be any direct competition for Model S in 2014. Other car manufacturers just do not want cannibalize their own ICE sales. Therefore they are not going to introduce compelling long range premium vehicle.

    GM is planning to release 200 mile overpriced small compact car by 2016 in hopes to attract government subsidies. Naturally it will not pose any threat to Tesla Model S.

    200 mile ranged BYD e6 has been on markets longer than Model S and you probably have not even heard of it. GM's new product is as bad position than BYD e6.

    Therefore only competition what Tesla faces comes that it competes against ICE cars such as Mercedes's and BMW's top models. Porsche Panamera non-hybrid is perhaps the most direct competitor for Model S.

  • Report this Comment On January 01, 2014, at 1:57 PM, thegreentreefrog wrote:

    The TESLA S @ 4,741 Lbs THE ELECTRIC PIG !

    Who would spend $75,000 on a car that could not beat a 1981 Chevy Vega in a race from NY to Philly?

    Its so far ahead of it's time , Its half way to the junkyard!

  • Report this Comment On January 01, 2014, at 2:44 PM, Pixma25 wrote:

    @thegreentreefrog I accept your challenge. My Tesla S vs. your 1981 Chevy Vega from Times square to the Philadelphia museum of art (made famous in Rocky).

    We can race for honor, or if you've got the nerve and $, a $10,000 prize.

  • Report this Comment On January 01, 2014, at 2:52 PM, duuude1 wrote:

    Treefrog - you might want to stay off the roads unless you want the electric pig to squash you. The Model S accelerates the 4,647.3 lb pig from 0-60 in less than 4.4 sec. Want to pit your 1981 Chevy Vega against the Tesla?

  • Report this Comment On January 01, 2014, at 3:23 PM, duuude1 wrote:

    Here's a bold bet. Sometime in 2014 Duuude1 will be backing up the electric truck to buy an electric boat-load of this shocking Tesla stock.

    Long term, this company is going to crush it. Short term there are enough numbnuts, wingnuts, and dry-roasted nuts putting the doubt on Tesla, that the stock will be volatile. That will only hurt short-timers, but is the opportunity for long-term buy-and-holders like me.

    Daniel - I disagree with your bold bet #2 - and will bet you a share of Tesla that there will be NO Model S competitor launched in 2014. There will be other electric or hybrid vehicles, but none will play in the Model S price range. That would be dumb. The other conventional car companies are timid, lacking innovation and risk-taking, lacking in breakthrough engineering talent and management skills, and all the other typical shortcomings of established big companies - but they are not dumb. Launching a Model S competitor would be dumb. They would be crushed. But Tesla's competitors might try to play at the mid-range all-electric or the low-mid range hybrids. Anything to avoid a head-to-head with Tesla which they know they would lose - for now.

    I will make a completely different "bold bet" - or perhaps just a goofy one... Car companies are a capital-intensive company, and one I am reluctant to invest in, even with someone as brilliant as Elon at the helm. But one of the reasons I want to invest is I believe one of the significant revenue streams will be licensing revenue about 2-3+ years out. I think Elon will put his money where his mouth is, and will foster his own competition, and will license *some* of his technology to conventional car companies - which to a limited extent he is already doing. I think many years out licensing revenue will be comparable to sales of their own vehicles.

    Lastly, I'll bet that Model X will come out end of Q3 to beginning of Q4 2014. I want to buy before that happens. Otherwise I think I'll be locked out for good.

    Duuude1

  • Report this Comment On January 01, 2014, at 3:34 PM, deeageaux wrote:

    I thought the goal and one of Elon's triggers for TSLA stock options was 25% GM. I thought that would be very impressive. But 29%?!

    I don't recall an all new vehicle coming from a major auto manufacture without the market knowing about it at least 3 years in advance. They tease, prototypes, alpha then beta models ,etc.

    No BEV or FCEV so far that will compete directly with Model S. Toyota FCEV more like a Chevy Volt comparable car at triple the price.

    It seems most OEMs are waiting, searching for a battery that will leap Tesla technology. It could come in a few years or a few decades. Nobody really knows.

  • Report this Comment On January 01, 2014, at 4:24 PM, CrazyDocAl wrote:

    Who cares about gross profit? Tesla needs to make even more gross profit per car if it wants to pay the bills. So far the company has only made a net profit by selling rights to patents and energy credits. OTOH Ford's 15% gross actually leads to a net profit per car.

  • Report this Comment On January 02, 2014, at 12:19 AM, SteveTG3 wrote:

    Daniel, I agree it is likely they will pass not simply stop at 25% on gross margin improvements. 29% sounds like a reasonable guess.

    As to competition... totally agree with prior poster. You really may want to write a correction on this... it's just not going to happen. There is a process that takes 3 years or more beginning with showing a concept car at auto shows. No one else has even reached this first step. So, the closest thing that could happen to your prediction is that we find out in 2014 that someone might have a 200+ mile range car in 2017 at the earliest. Please consider correcting your story.

    fwiw, Musk's statement on CNN was not a throwaway comment or saving face (not that you implied it was either). Musk has continually expressed his desire for competition... he has consistently said he started Tesla to move other automakers to start delivering EVs.

  • Report this Comment On January 02, 2014, at 11:00 AM, weaponz wrote:

    I think Tesla is going to get profit margins way above 29% in 2014. Also, competition is unlikely in 2014 as it takes years to create a new platform. This is not cellphones where competition can just release a competitor in a year.

    @thegreentreefrog - That is how much most full sized sedans weight. I don't see where your going.

    Also, a race from NY to philly? seriously? I would hardly call being stock in traffic a race. But it is a race you will 100% lose. It is easily in the range of a Tesla Model S even for a trip back and forth on 1 charge.

    Except a Tesla Model S has access to HOV lanes.

    @CrazyDocAl - For a growing company, gross profit and growth are the most important things. Reporting net profit is a waste of money and potential. Your just paying taxes on money that could be used for growth instead.

  • Report this Comment On January 02, 2014, at 1:35 PM, chefp wrote:

    Ford & GM sell garbage. They put lipstick on a pig and people drool over "new & shiny" when it's the same old junk. People who try to compare those old dinosaurs against Tesla are the real fools.

  • Report this Comment On January 04, 2014, at 12:38 PM, Keithx13 wrote:

    Tesla is a fine company, the cars are great, but the electric grid in antiquated and (already) overloaded without a fleet of electric vehicles trying to recharge every night. You might want to hedge your bets in Tesla with a few shares of Generac and Cummins.

  • Report this Comment On January 04, 2014, at 1:32 PM, weaponz wrote:

    @Keithx13 - The grid is outdated, but more than capable of taking on a lot of electric vehicles. Where I live peak electric rates are 30 cents, offpeak electric rates are 1 cent. Fact of the matter, most night capacity goes underutilized, that is what EVs will use, the offpeak capacity.

  • Report this Comment On January 05, 2014, at 9:25 AM, cmalek wrote:

    If GM is just now "interested in producing 200+ miles EV" then it is going to take them at least ten years before they put something on the market that is comparable to a Tesla. In the meantime Tesla is going to be improving their vehicles. By the time GM rolls out their 200+ miles EV, Tesla will have a 300 or 400+ miles EV and GM will still be way behind.

    @weaponz:

    The grid is outdated and OVERLOADED. In some areas of the country, rolling brownouts are already common. If the capacity is not there, the electricity rates could be .001 cents and you will not be able to charge your EV unless you have your own generator. Which, by the way, would defeat the entire purpose of having an EV. Whether you burn hydrocarbons to power a vehicle or to charge it, you are still burning hydrocarbons and polluting.

  • Report this Comment On January 13, 2014, at 8:13 PM, MinorCorrection wrote:

    I thought it was entertaining greenfrog's reference to a 1981 Vega. It would be tough for it to win when the Vega was only produced from 1971-1977. I was surprised that none of the follow comments, especially from duuude1 pointed that out, besides a Chevy Vega had a 11 gallon gas tank and peaked at about 25 mpg...maybe. I don't know the distance between the two points, but the Vega's range wasn't all that great.

    Although Tesla is certainly a pioneer in this area, there are not a lot of people that are able to plunk down $100k+ for a car, even without the additional expense of gasoline. For most people there is the effective cost per mile for transportation. For people who have to drive long distances all day, the car would great, but may not have the range. For those who don't drive many miles a year, the initial and recurring monthly cost of ownership is way up there if you normalize it on a cost per mile basis. You have to want a Tesla for the oohs and ahhhhs it would draw, both for its looks and it being cutting edge, but certainly not as a cost effective alternative transportation in most cases. But I guess if you have $75k-$110k to plunk down, I'm guessing you really aren't going to care about anything else, the coolness factor is a good enough reason to buy one (BTW-no slight was intended by my last comment, I'd own one if I was lucky enough to be able to afford it!). Cheers!

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