Tesla's Model S. Photo Credit: Tesla Media Gallery.
Tesla (TSLA +0.69%) is a rare company and a rare investing opportunity. It's truly disrupting an automotive industry which continues to sell nearly all its vehicles with internal combustion engines. Its Model S has a personality fused between a sports car and a luxury model and is truly a step above anything else in the EV market – maybe a few steps ahead. In fact Tesla's Model S scored 99 out of a 100 when Consumer Reports tested it – a special feat, to be sure. So what's one thing that could bring Tesla down from its high horse? Hint: It has something to do with CEO Elon Musk laughing out loud at the competition recently.
Reason for optimism
Before we get to one thing that could drop Tesla down a notch or two, let's cover why the red-hot company, which is up nearly 300% year to date, has reason to gloat. Wall Street and many analysts focus much of their attention on the short term and on whether a company beat or missed EPS, and that's the first reason for Tesla's optimism.
Earlier this week, Tesla announced that on a non-GAAP basis it earned $100 million in gross profit. That's good for a gross margin of 22%, or 13% without one-time zero-emission vehicle, or ZEV, credits – still a ways from its 25% gross margin goal in the fourth quarter. On that non-GAAP basis, its profit was good for $0.20 per share which was a large beat compared to Wall Street's average estimate of a $0.17 loss per share. That marks two consecutive quarters where analysts expected a loss, but instead a profit was delivered. Despite the critics hollering about GAAP and non-GAAP accounting by Tesla, the report was enough to send the stock soaring to a new high – and that's just EPS.
The good news continues, because there are many other factors that aren't earnings-related that paint a nice picture for Tesla. One important aspect in a young growth company is showing that demand still far outpaces supply, which is easily accomplished at Tesla. Its planned growth for 40,000 vehicles is still seemingly on track and the company's recent purchase of land next to its current facility for future production expansion is a good signal.
On top of demand already outpacing supply we have to keep in mind that Tesla is unique in that it has no traditional mainstream advertising – that could hugely benefit demand for Tesla vehicles in the future. It's also still building out its infrastructure for supercharging stations to make its plan reality rather than a futuristic ploy. Tesla has plenty of growth and plenty of positive factors going for it today – although I believe much of that is baked into Tesla's high valuation. But there is one thing that slightly worries me.
A laughing matter?
During Tesla's conference call earlier this week Musk was asked by a respected Morgan Stanley analyst, Adam Jonas, about competition from BMW's i3. His response was to laugh out loud for a few seconds time, before gathering himself and answering the question.
Aside from being slightly unprofessional, that's definitely arrogant. That's the type of arrogance we saw at Detroit's Big Three automakers right before their ignorance ran their respective businesses into the ground. Obviously these are different circumstances, but I would temper my laughter when facing companies with hundreds of millions of dollars that could be spent on EV's to develop a vehicle that can compete with Tesla. I would especially temper my laughter when those companies are in much better financial standing than in the past decade.
Consider Ford (F 1.39%) for a split second, a company that has recently proven it understands very well where to develop cars in popular segments. It already has six electrified vehicles and has grown its market share to nearly 16% in the first half of 2013. Through June, Ford sold more than 46,000 electrified vehicles. To be fair this can't be an apples-to-apples comparison with Tesla sales because Ford includes hybrids, plug-in hybrids, as well as its battery-electric vehicles.
In fact, Ford is hiring more than 200 new electrification engineers and expanding its research facilities to speed development of hybrid and EVs. Ford has also invested more than $355 million to design, engineer, and manufacture components for its EV lineup. Moreover, $50 million will also be spent to invest in research and development facilities to reduce its EV development by as much as 25%.
As EV sales continue to grow into a bigger and more profitable segment, you can bet that the big boys will have more to say and Musk will have less to laugh about. For now Tesla's arrogance appears warranted – but it's the long haul that rewards investors, and the game is far from over.
