On Wednesday afternoon, Tesla Motors (TSLA 0.88%) reported a wider than expected Q4 loss. However, the company provided a relatively upbeat outlook for Q1 and 2013 as a whole. This should give investors confidence that the company's shift to mass production of the Model S sedan is gaining traction.
The results, in a nutshell
Tesla delivered 2400 Model S units last quarter, and booked 6000 new reservations. Revenue increased by 500% sequentially to $306 million as production ramped up, and gross margin reached 8% despite various cost headwinds. This led to a GAAP loss of $0.79 per share (or a $0.65 loss on a non-GAAP basis). While the company experienced negative free cash flow of $102 million last quarter, Tesla still ended the year with more than $200 million of cash.
Liquidity has been a problem for Tesla in the past, but the company was cash flow positive in December, and expects to be around breakeven in Q1. Furthermore, Tesla expects to post a non-GAAP profit this quarter. Tesla's improving profitability is primarily driven by the company's progress toward reaching steady-state production of approximately 400 cars per week.
The higher production rate will improve Tesla's production efficiency, boosting gross margin. Gross margin was very low in Q4 for two main reasons: labor inefficiency and supply chain inefficiency. Both problems are typical of launching production of a new vehicle, but will dissipate fairly quickly. Tesla hired a number of temporary workers to help increase production to 400 cars per week, and also had significant overtime expenses; full-time production workers worked an average of 68 hours per week in December. The company also incurred significant (unexpected) air freight expenses in order to keep components in stock.
The road ahead
By the end of Q1 Tesla should be approaching "normal" production costs. Tesla CEO Elon Musk stated that the average work week is now down to 50 hours, and should decrease again next month, which will reduce overtime expense. He also expects Tesla to cut down on its temporary workforce during the course of 2013. Lastly, most supply chain bottlenecks have been resolved, as suppliers recognize that Tesla will be able to meet its production goals.
With Tesla likely to post its first annual profit this year, the stock seems like an attractive growth investment. Management is very confident that it will be able to meet its goal of selling 20,000 Model S sedans this year, and expects to grow that number in 2014. Tesla's second mass production vehicle, the Model X crossover, is set to go on sale next year. This product will grow Tesla's addressable market, while leveraging research and development costs, since it shares the same platform as the Model S. As a result, analysts currently expect EPS to grow to $1.62 in 2014.
Can others compete?
Thus far, Tesla's Model S has seen strong demand, despite its premium price. As competitors bring new electric and plug-in hybrid cars to market, the question is whether these will hurt demand for Tesla's cars. For example, General Motors (GM 1.44%) is planning to begin production of the Cadillac ELR plug-in hybrid later this year. While not an all-electric car, the ELR will probably provide a premium experience at a lower cost than the Model S. However, Tesla's innovation and "cool factor" should keep it ahead of GM in this segment for the time being, as luxury car buyers are not very price sensitive.
