Tesla Motors Inc. Stock Is Racing to New Heights: Is It Time to Sell or Buckle Up for the Long Haul?


Tesla's Model S charging. Source: Tesla Motors

Few companies offer a story as intriguing as that presented by Tesla Motors (NASDAQ: TSLA  ) . The young company, which produces only electric vehicles, certainly has the potential to change the way the world views transportation sans gasoline. That said, its infrastructure battle is one that the company largely fights on its own, and it will take time to make transportation by electric vehicles as easily feasible as it is by internal combustion.

Meanwhile, by GAAP standards, the company and all its potential is still unprofitable. Despite its continuous burning of cash, Tesla's growth story is so compelling investors continue to jump on the bandwagon -- a pattern that baffles Tesla bears. Here are some details from Tesla's fourth quarter and how I view the stock as of today.

By the numbers
Tesla's bears will quickly point out that the company lost $16 million, or $0.13 earnings per share by GAAP accounting standards. However, with such a young and potentially revolutionary company, the bottom line isn't as important right now. What's important is current growth and laying the track for future growth. Tesla continues to deliver on those two promises and that continues driving the stock price higher. 

Last quarter Tesla delivered 6,892 vehicles and totaled 22,477 vehicles for the full year. That translates to more than $2 billion in sales on a GAAP basis. In terms of future growth Tesla expects to increase sales by about 55% this year to 35,000 Model S vehicles. Keeping in mind that Tesla historically under-promises and over-delivers, here's what its minimum growth expectation looks like.


Model S global deliveries will surge after Q1 to meet 35,000 goal. Source: Tesla letter to shareholders.

As the company is still saddled with a problem that most companies would prefer to have -- its demand exceeds supply -- Tesla will focus on accelerating production this year. Currently the electric vehicle maker produces about 600 cars per week, and plans to reach 1,000 cars per week by the end of the year as bottlenecks are removed and efficiency is improved.

Nearly as important as its production ramp up and its delivery figures is the profits derived from each vehicle. Tesla met its goal of reaching a 25% gross margin, excluding Zero Emission Vehicle Credit sales, and reached 25.8% on a GAAP basis in the fourth quarter. That's just the beginning of the story, as the company plans to reach 28% by the end of this year -- and that's planning on a lower amount of premium priced options on its vehicles! There is clearly room for a surprise in terms of gross margin by the end of 2014.

As promising as the improving gross margin and production figures are, what is perhaps the most thrilling to see from management was this tidbit from the company's press release: "Please note that Tesla is not trying to achieve the absolute highest possible gross margin, as this would require following the industry practice of charging excessive prices to customers in certain markets, which we believe is inconsistent with building long term loyalty."

That follows the company's recent ethical stance regarding its Model S price in China. Tesla refused to increase the price more than necessary to cover extra costs associated with selling in the region, as the rest of the automotive industry typically does. I'm paraphrasing here, but the company believed cheating the customers by irresponsibly inflating the prices on its products isn't a good way to build consumer loyalty -- I'm in sound agreement.

With Tesla's story looking promising in terms of gross margins, production, demand, and ethical standards, it paves the way for its future vehicles -- which will be a huge driver of the stock price throughout the remainder of the decade.

Model X and Gen III
Tesla's Model X is planned for a late 2014 release with a significant ramp up in production set for next year. While Musk doesn't give out specific details, judging by deposits the initial demand for its Model X is significant. Consider that during a record-setting quarter for deliveries, Tesla's deposits still rose from $140 million to $163 million. That suggests demand remains healthy for the Model S and is building for the Model X; or as Musk puts it, it's like fish are jumping into the boat, since the company isn't even trying to sell the Model X.

As the Model S continues to increase company sales globally, the Model X will help grow revenues to support progress on the company's more affordable Gen III vehicle -- a hugely important step for the young start-up company to become a major player in the automotive industry. While that step is years away, important details regarding Tesla's plan for building its battery factory are set to be released next week. Tesla's factory will enable it to achieve a "major reduction" in the cost of its battery packs and even accelerate the pace of its battery innovations. This will be a crucial element to making a feasible and affordable Gen III vehicle.

Foolish bottom line
Tesla's story is a compelling one, one that could change the way consumers and investors view transportation around the globe. I'm bullish on its current products and excited for its future vehicles. I'm bullish on the way the company does business, and Elon Musk is a savvy business visionary. Wall Street seems convinced, as the stock is up nearly 10% after the fourth quarter results and is cruising past previous highs.

Despite the high stock price, if you invested now and the company delivers on future potential you would still likely be handsomely rewarded on your investment. Tesla's story is still in the early innings and, as in life, there are many hurdles the company faces. Eventually the company will hit a speed bump and its stock price will surely take a whacking in the process -- and I am waiting for that opportunity to jump on board. For those of you who are already on board, enjoy the ride, this could be a once in a generation story.

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Read/Post Comments (10) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2014, at 1:15 PM, ckgod wrote:

    The reason people pay this price for the stock is they think there is a good chance Tesla will go conquer the EV and even the automobile world and worth 500~1000 or even more. You make your decision base on how likely you think that will happen. I want to put my bet on Elon. It won't be an easy task but I don't think there is a better person who can pull this one off.

  • Report this Comment On February 20, 2014, at 2:30 PM, joeinslw wrote:

    What many bears on tsla stock don't see or don't want to see is the growth potential that Tesla Motors has and will have for many years.

    This car is the best and safest car on the road now, and the bears don't see or don't want to see that either. The Model S is the only car that can go over two hundred miles without a charge, and without using one drop of gas, to the longs or bulls that support Tesla, that's huge and we can't, no... we won't ignore those facts.

  • Report this Comment On February 20, 2014, at 5:16 PM, AnsgarJohn wrote:

    Hello Daniel,

    Could you provide the discounted cash flow calculation you made to conclude that: "if you invested now and the company delivers on future potential you would still likely be handsomely rewarded on your investment. "

    What do you think of this calculation saying the value is between $50 and $100 per share? http://aswathdamodaran.blogspot.nl/2013/09/valuation-of-week...

  • Report this Comment On February 20, 2014, at 6:41 PM, foolknotts wrote:

    I don't understand the hype about electric cars. Just where do people think the battery charge is going to come from? Electric power plants need coal or natural gas to produce electricity. It is a ruse to think that because we use electric cars we are not using any fossil fuels. I would see a much bigger future in hybrids, such as the Toyota Camry, which builds its electric power from the movement of the wheels, and thus uses much less fossil fuel. It seems like a win/win situation. It seems the mindset is that electric cars do not consume energy, which is just putting one's head in the ground. All that electricity which charges up the Tesla's batteries have to be run on fuel.

  • Report this Comment On February 20, 2014, at 8:16 PM, BDKliewer wrote:

    I've never met anyone who thinks electric cars don't consume energy. But electric cars can reduce the amount of fossil fuels used for electrical generation ( which will continue to diminish regardless of the type of vehicle). The power generation and distribution companies are learning to better adapt to the fluctuations in sources such as solar and wind. A few years ago, we signed up for 100% wind source when our provider was quoting a rate that would add about $15 to our monthly bill, but it never exceeded $6 even during the summer months because there are no fuel surcharges for wind. This past year that's dropped to $2 - $3 per month. Our provider now says that wind has become so economical that when the subsidies go away wind will still be competitive with fossil fuels. Additionally, many of the EV charging stations are solar powered. Since most charging will occur overnight, the next step will likely be local storage during the day that then charges vehicles overnight. There are also promising new battery technologies that may prove safer, more environmentally friendly, and possibly less expensive than lithium ion. Like the hybrids, the Tesla also uses regenerative braking to transfer some of the energy back to the batteries. Unlike hybrids (which use only fossil fuel if they aren't plugins or the owners don't actually plug them in) an EV car is dependent on fossil fuel only to the extent of the available electrical source.

  • Report this Comment On February 20, 2014, at 8:17 PM, bluescreen wrote:

    Hello Foolknotts,

    EV's achieve a higher efficiency in terms of energy usage than any other type of engine including ICE and Hybrids. Even though energy may be produced using coal/gas plants would achieve a better use (less use) than any other vehicle.

    Secondly you don't necessarily need to use fossil fuels to produce energy for these cars. You can use alternatives source of energy. With ICE and Hybrids you're stuck with fossil fuels which not only damage our planet but also are not renewal in any way.

    I'm not a TSLA bull. I really like Elon Musk as CEO and the way he setup and runs the company but the current valuation is ridiculous from any investor focusing on the fundamentals.

    Like many said... "The stock market is a voting machine in the short term and a weight machine in the long term"

  • Report this Comment On February 21, 2014, at 1:33 AM, PeakOilBill wrote:

    Once Musk begins selling his affordable vehicle for the masses, he will sell Tesla to one of the giant international car manufacturers, probably German or Korean. Who knows how much they might pay. It would have to be a LOT because Musk has a business degree, and needs a vast amount of money for his Mars adventure. He will probably sell sometime after 2016, if the right offer comes along. I wonder if he would sell to the Chinese government? I would guess not. But enough billions might change his mind. Colonizing Mars won't be cheap. And that is his lifelong dream.

  • Report this Comment On February 21, 2014, at 11:18 AM, damilkman wrote:

    My theme while watching these billions of threads is the moat. How do you tell the difference between the next Apple verses the next AOL? Right now Telsa has great margins because they sell a 70K car for 100K. That is great for the the luxury car market. Apple was able to prosper as a niche player until they produced products that everyone wanted. The question is can Tesla produce a 25K car that does remotely what the 100K car is doing today and keep the moat?

    If other automobile companies figure out how to build a better battery the moat is gone. Using the analogy when cable modem became standard, AOL tanked.

    The tricky thing with investing in technology companies is they are always priced two steps ahead of projections. So it is a massive leap of faith that often bombs. For every Apple or Amazon there are a dozen Cisco's, Junipers, Blackberries, Level3, name your favorite tech darling of the internet bubble. Don't forget Celera. All of these companies were also lead by leaders who were viewed by the bulls as visionaries.

  • Report this Comment On February 22, 2014, at 9:17 AM, dragonmonkey wrote:

    The issue isn't whether it is a great car, if the technology is a game changer, or if the company will grow...it is simple valuation. If you could guarantee Tesla will be as large as Ford or Honda in 10 years, I'm still not sure it would be worth buying at this price. Outstanding growth at this point could still produce underperforming long-term price appreciation. If at any point it disappoints, there will be a major correction. I might buy a Tesla someday, but that doesn't mean the stock is automatically a buy.

  • Report this Comment On February 22, 2014, at 3:21 PM, cmalek wrote:

    @bluescreen:

    "The stock market is a voting machine in the short term and a weight machine in the long term"

    So basically the stock market is a popularity contest with no solid reasoning behind it. Just look where the voting/weighing machine paradigm has gotten us with our presidents. Very few were even barely competent, BUT they were popular.

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