Will Tesla Earnings Scare Ford and General Motors?

Tesla Motors (TSLA 4.96%) will release its quarterly report on Tuesday, and investors are expecting the electric-car upstart to report an adjusted profit for the third quarter in a row. With the rate of growth that Tesla has seen lately, should Ford (F 0.69%) and General Motors (GM 1.20%) start getting scared if Tesla earnings continue to move sharply higher this quarter?

Source: Wikimedia.

Tesla has generated controversy among investors ever since its IPO, with skeptics pointing to its sky-high valuation while proponents argued that its growth rate would justify premium share prices. So far, the bulls have had the better part of the argument, as Tesla faster-than-expected journey to profitability points to the huge early success of the Model S. But even as value investors keep saying the stock is too expensive, the more important long-term question is whether Ford and General Motors will start reacting more directly to Tesla's competitive threat before Tesla can gain any further momentum. Let's take an early look at what's been happening with Tesla Motors over the past quarter and what we're likely to see in its report.

Stats on Tesla Motors

Source: Yahoo! Finance.

How far can Tesla earnings grow this quarter?
Analysts have kept boosting their views on Tesla earnings in recent months, having formerly expected only around break-even results for the third quarter and boosting full-year 2013 and 2014 estimates by $0.60 to $0.70 per share. The stock has been volatile but is up 20% since early August.

Tesla's second quarter results spurred even more excitement about the electric-car maker back in August, with the company surprising investors by posting an adjusted profit. Tesla beat its own sales goal by selling 5,150 Model S cars during the quarter, and the company expects recent gains in margins to help it meet its goal of 25% gross margin by the end of 2013.

The Tesla Model S. Courtesy Tesla Motors.

So far, much of Tesla's success has come from a near-complete lack of viable competition, as existing electric vehicle alternatives have short ranges. But General Motors said in September that it was working on an electric car with a range of 200 miles yet would cost half what the Model S does. The big question for GM is how quickly it can roll out a rival electric vehicle, especially given that Tesla is working on a more affordable model of its own for more cost-conscious car-buyers. If General Motors can't roll out its lower-priced EV entrant first, it could end up being too far behind the times to be relevant.

Meanwhile, Ford, General Motors, and other automakers are also looking at alternatives to avoid the major battery challenges that face electric vehicles. Ford has been part of a partnership with Daimler and Nissan to develop hydrogen-powered fuel-cell vehicles by 2017, seeking to eliminate the need for heavy and expensive lithium-ion batteries. With two separate incidents of Model S cars catching fire in the past month, Tesla could face backlash despite the obvious rejoinder that hydrogen could pose just as much if not more of a risk.

One fascinating aspect of Tesla comes from CEO Elon Musk's assertion that Tesla could offer cars that could drive themselves for 90% of the miles that drivers use them. General Motors and Google have done their own work with self-driving vehicles, but Musk's reputation as an innovator arguably lends Tesla more credibility in its claim.

In the Tesla earnings report, be sure to look beyond the headline numbers to see where adjusted profits are coming from. With zero-emission vehicle credits starting to ramp down, Tesla will need to generate more of its profit the old-fashioned way. For now, though, it looks like Tesla has momentum on its side.

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