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3 Challenges Facing Tesla Motors in 2014

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Tesla Motors (NASDAQ: TSLA  ) has come a long way since 2011, when it was one of the most shorted stocks on the Nasdaq. On top of being one of the best performing stocks last year, Tesla posted its first ever profit and the electric-car maker's Model S sedan was crowned Motor Trend's 2013 Car of the Year. However, the California-based company faces serious challenges in the year ahead.

Let's take a closer look at three major hurdles Tesla will need to overcome in 2014, and how investors should play the stock going forward.

Mounting costs
Tesla is expected to make significant capital investments in 2014 -- particularly as the company builds out its worldwide supercharger network and expands into new markets overseas such as China. Such added costs would hurt Tesla's bottom line. For its upcoming fiscal fourth-quarter, the company could see a 25% spike in research and development costs, as Tesla accelerates development efforts on its Model X crossover vehicle.

On top of this, fourth-quarter selling, general, and administrative expenses are expected to rise 20% as Tesla pours more cash into new retail locations, service centers, and supercharger facilities.

Source: Tesla Motors.

Having said that, these investments are critical to Tesla's ongoing success. In fact, the company's supercharger network is a tremendous value creator for Tesla as it creates a global infrastructure for gas-free driving. Moreover, Tesla is charging ahead with plans to install supercharging stations that cover 80% of the U.S. population and parts of Canada this year. Therefore, investors in this name need to get comfortable with the axiom that it takes money to make money.

Delivery delays
Tesla's long-awaited crossover EV is scheduled to hit the road later this year. However, we could see more delays related to supply constraints. The automaker put the brakes on production of its Model X last year, pushing back the delivery date to late 2014, a year later than Tesla had previously promised.

Tesla first unveiled its Model X in 2012, at which point thousands of drivers coughed up the $5,000 deposit required to reserve the all-wheel-drive vehicle. And who can blame them? Similar to Tesla's Model S, the performance Model X can accelerate from 0 to 60 mph in 4.4 seconds. To put that in perspective, that's faster than the Porsche 911 sports car -- only, unlike a sports car, the Model X can comfortably fit seven large adults, with room to spare.

Tesla Model X. Source: Tesla Motors.

While this should make the Model X a competitive force in the auto industry, Tesla could see order cancellations if it isn't able to hit its updated delivery date slated for the end of this year. After all, supply constraints have held Tesla back in the past. In November, the company said production during its third quarter was curtailed by capacity constraints for the lithium-ion batteries that power its electric cars.

Investors will want to keep an eye on how Tesla addresses these supply issues going forward. Moreover, Tesla's future greatly depends on the company's ability to produce more affordable cars at a faster pace, particularly if the stock is to live up to its lofty valuation. Shares of Tesla currently trade around 98 times next year's earnings.

Bloodthirsty rivals
Competition from deep-pocketed rivals is another risk factor to consider. Big autos including Ford and General Motors (NYSE: GM  ) are investing both time and resources toward stealing market share from Tesla in the niche EV space. General Motors even enlisted a special team of GM employees to study Tesla's disruptive battery technology last year. GM now says it's developing a mass-market electric-car capable of traveling 200 miles on a single charge, in an apparent attempt to challenge Tesla's lead in the long-range battery battle.

Tesla certainly has the upper hand when it comes to EV battery technology these days. However, compared with Tesla, GM and Ford have significantly more cash on hand to invest in R&D. As a result, Tesla needs to keep innovating if it's going to stay ahead of competitors in an industry where economies of scale favor traditional automakers.

What it all means
Tesla has an extraordinary track record when it comes to beating the odds. However, it's still early in the game for this company, and there will certainly be more obstacles to overcome down the road. Nevertheless, management's reputation for near-flawless execution makes Tesla a worthy investment for patient long-term investors today.

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Read/Post Comments (11) | Recommend This Article (4)

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  • Report this Comment On January 08, 2014, at 9:06 AM, dimestop wrote:

    you're UNDER A TYPICAL "biz analyst illusion!"


    b. YOU ARE WRONG in this type of thinking...(you are JUST "arm-chair quarterbacks" THINKING YOU "KNOW what the consumer WILL DO...


    1. back in 1975... my 71 240z... was getting a bit old...

    2. So, I decided to replace it...

    3. only problem the 75Z that was available WAS SO HAMPERED by "gov mandated pollution" stuff..THAT IT "WAS MUCH SLOWER IN PERFORMANCE THAN BY 71Z..

    4. so WHAT DID I DO...

    a. I ORDERED A "76 280Z" ...that was going to have "significant performance improvements" over the "only available 75 280z" more in the performance range of my original 71 240z...


    c. THE ANSWER IS: (and this is where you biz "arm-chair quarterbacks GOT IT ...GET IT "WRONG!"

    d. I BOUGHT A "75 MAZDA WANKEL SEDAN"'s was "quite quick and peppy" ...not as good as the Z cars... but then IT WAS JUST A FILL IN 'TIL I GOT MY 76Z...

    e. when THE 76Z did finally come in ...I WENT TO THE DEALER AND PICKED IT UP...

    (both of THESE CARS "I PAID CASH FOR"...many people who buy "higher end cars" CAN AFFORD TO DO THAT... (LIKE TESLAS...GET IT???)



    a. turns out the Mazda wankel sedan WAS A "REAL GUZZLER" dealers EVEN THOUGH THIS CAR was "almost knew" and less than a year old...WELL THEY WOULD ONLY GIVE ME ...

    .25 cents on the dollar...LIKE I would really "lose thousands" ...


    ...IT'S THAT SIMPLE ...

    SO...TESLA "gonna lose sales on X suv" ???...YOU ANALYSTS ARE "DUMMIES" ...



    I'll still be blastin' around in my HYPO-GUZZLER...

    or maybe I'll buy a MUSTANG OR CAMARO Z...the expensive performance ones... can always DUMP THEM LATER...



    (I just happen to want a Tesla with "all wheel drive" LOVE THE ELECTRIC CAR ...but I want the "all wheel drive" for traveling, camping, winter weather stuff...


    as long as I get one eventually (AND THERE IS NO SUBSTITUTE... that big guzzler IS GONNA COME UP WITH anytime soon...

    SO, I'LL LOOK FORWARD TO THE "TESLA X SUV"...whenever...

    THAT'S "HOW IT IS"...

    AND "hundreds of thousands" OF PEOPLE "think more LIKE ME" than like "you number crunchers DUMBIE arm-chair quarterbacks...etc."

  • Report this Comment On January 08, 2014, at 9:56 AM, Sam026 wrote:

    I noticed that 'making a profit' isn't one of her challenges. Is the question really is: "How much longer is the market going to wait for a ROI from Tesla?"

  • Report this Comment On January 08, 2014, at 10:21 AM, dimestop wrote:



  • Report this Comment On January 08, 2014, at 11:17 AM, robinj99 wrote:

    I am not a financial genius, but according to company published data, they lost about $38mm in Q3 of 2013. I can't find anything to suggest they have ever made a profit on a GAAP basis. Only magician like false reporting of data would make it appear they are anywhere near ever making money.

    Yes, it is a beautiful car with awesome performance....but an ugly stock that may see its performance left in the dust in 2014

  • Report this Comment On January 08, 2014, at 11:34 AM, deeageaux wrote:

    Tesla increased cash on hand in Q3 by $49M despite rapidly increasing the supercharger network, expanding into Europe, and funding the development of Model X.

    Only a fool would call that losing money :)

    GAAP does not have a category for the hybrid sales/lease Tesla offers. Under advisement from their public accounting firm, Tesla's GAAP numbers assume all their customers will sell back their Model S after 3 years and those cars will be worth zero. Tesla did that so as not to be sued by investors but we know that is not the case. But Tesla has no basis to make a prediction on how many cars will be sold back nor what their residual value will be in three years but it will not be zero.

    KPMG just did a study of the automotive industry in 2029, They believe there will only be 6 independent auto firms on the planet by then. And the only American headquartered firm will be Tesla.

  • Report this Comment On January 08, 2014, at 12:27 PM, robinj99 wrote:

    An increase in cash on hand has absolutely nothing to do with profitability. If you analyze Q3 2013 you will see an increase in liabilities of $253mm and a decrease in inventory of $229mm among other things.

    Perhaps by 2029 they will be profitable, but to value the stock today based on some possible event 15 years from now wouldn't appear to be sound investing.

    Of course we all know that stocks are not valued on their actual worth, but only based on what somebody is willing to pay for them. Welcome to Vegas.

  • Report this Comment On January 08, 2014, at 2:15 PM, deeageaux wrote:

    Yes, the cars Tesla "sold/leased" through Tesla financing is a "liability". Perhaps in GAAPland but not in reality. All those cars will not be sold back to Tesla and the cars that are sold back to Tesla will not be worth $0. Probably a new source for income for Tesla.

    Tesla can't make to 2029 losing $38M a quarter without raising outside cash and it can't raise outside monies losing $38M a quarter.

    Yep, cash going from $749M to $798M without raising outside monies means Tesla is losing money.

    Yep, KPMG are not only wrong they are complete morons. I mean worse than a Chrysler executive. LOL

  • Report this Comment On January 08, 2014, at 9:43 PM, frankviaje wrote:

    1. Tesla will be spending relatively money on R&D for Model X: it goes into production in 10 months!

    2. Perhaps you are confusing Model X with Gen 3?

    3. R&D will go to Gen 3, while S and X are making a 30% or better gross margin.

    4.Model X will make them a ton of money: look at all the people who have forked over sizable deposits for a car they have never test driven.

    5. Tesla makes a huge gross margin on Model S. and X will be the same or better.

    6. Your G&A statements are meaningless and you provide no proof. G&A percentage goes down as volume increases.

    7. People waited for S, they will wait for Model X!

  • Report this Comment On January 09, 2014, at 11:23 AM, mdk wrote:

    There is no doubt that Elon Musk is very smart guy who owns Tesla, SolarCity and SpaceX companies. I am wondering why some analysts are so fascinated and drooling about Elon Musk as if Elon Musk (ELMK) is being traded in Stock Market with all his companies under his name. The fact is Tesla is only one Car Company for now and has sold only 21,000 luxury cars in 2013 as opposed to over 300,000 luxury cars were sold by Mercedes and BMW separately, and hundreds of thousands cars by Toyota, GM and Ford worldwide. All companies have positive profit margins except Tesla with negative margin and its stock being traded unreasonably and way overvalued. I am not sure about the motives why some people called themselves analysts are pushing Tesla stock and some other stocks higher for no justifiable clear reasons. The bottom line is Tesla is a car company with huge competition ahead from luxury industry giants like Mercedes and BMW. If some comparing Elon Musk to Steve Jobs that is impossible. If they are dreaming about future of Tesla, I am sure the other much more established car companies have already begun plans for similar but perhaps much more safer and efficient production.

    My point is to remind regular investors who were around in 1999/2000 and 2008 or are new to the market to take a serious look at the whole situation. Very similar games are played now like in 1999/2000 by hedge fund and professional investors. Some stocks are pushed up 300% to 400% in last year alone as well as Dow, NASDAQ and S&P has gone up over 120% (more than doubled) since 2008, way ahead of economic improvement which has grown only 20% at the best. Still some “analysts” are preaching and pushing market higher in the media for no surreal reason. I recommend everyone who can read the chart, to take a look at Dow’s Max chart in MSN or Yahoo finance and realize where the future of the market is going, down to around 8000. Save your retirement money and investment now and get out if you can. You will be much happier in a year or two.

  • Report this Comment On January 09, 2014, at 1:28 PM, Sam026 wrote:

    Dimestop, deeagaeux and frankviaje:

    I noticed today that Ford just raised its dividend 25%.

    Hello, isn't that what companies do when they actually make money vs. playing with the books i.e. non-GAAP vs. GAAP. Remember Enron's "profit growth", the Tech bubble and the mortgage bubble. Burr!!!

    As for "30% gross margins" they aren't PROFITS until they cover all the other costs of the business; like engineering, management, R&D, cost of sales etc. with something left over for the owners.

  • Report this Comment On January 11, 2014, at 3:49 AM, douglas442 wrote:

    Is the "Tesla" EV-il?

    What with battery-fires coming on the heels of accolades, and certain financial pundits, pronouncing over-valuation and imminent falling of stock, advocating avoiding it like the plague.

    To ponder that question, let's first consider:

    Modern cars of today are engineered with every manner of modern technological convenience... from built-in infotainment systems to even the ability to park themselves, but...

    ... most of them still burn gas, folks, just like they've been doing for over the past century and...

    ... basically, we humans have been "burning stuff" as our energy source for the past fifty to one-hundred thousand years, and so...

    ... Time for some changes.

    Just like the changes and promises that had once been pioneered by this car's namesake, Serbian-American inventor Nikola Tesla, who endeavors, "Ridiculed, Condemned, Combatted", were finally snuffed out by the cunning of the advocates of a more financially "profitable" system.

    "Bloodthirsty rivals"? What an interesting choice of phrases!

    So... I just find it interesting that, at the same time while all this is going on with TSLA, NBC decides to launch a tv series whose principle role is drawn from a shallow though obvious caricature of The Inventor Tesla... down to his Eastern European origins, his inventions, his very appearance... and labeled him as a monster with diabolical plots of his own underlying all his seemingly beneficent plans.

    Incredible!... a nasty below-the-belt, considering... and so here we go again! They just won't let the poor man rest in peace. Or let the most ambitious aspects of all his dreams ever see the light of day.

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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