Tesla Motors' (TSLA 0.70%) stock handily outperformed the S&P 500's 8% gain in 2014, delivering a sweet 35% rise. Looking at the past year, it's a great time to review some bold bets I made about Tesla going into 2014.
Source: Tesla Motors.
Bet No. 1: Tesla will achieve a gross profit margin of 29%
I predicted that on the strength of continued pricing power, further economies of scale, and production improvements, Tesla would boost its third-quarter 2013 automotive gross profit margin of 21% to 29% by the end of 2014. While it's still too early to see where Tesla's automotive gross profit margin finishes the year, the company predicted in its 2014 Q3 letter to shareholders that its non-GAAP automotive gross margin will exceed 28% "in late Q4." Importantly, this non-GAAP figure excludes the benefit of zero-emission vehicle credits.
Considering that Tesla reported results more than a month into the fourth quarter, having meaningful vision into how the quarter will play out, Tesla will likely deliver on its prediction, proving my own estimate to be slightly too bullish.
Tesla's shortage of production in Q3, which will reduce Q4 deliveries by 2,000 vehicles, played a key role in making my prediction of 29% too optimistic. Higher deliveries mean fixed costs are spread across a larger number of vehicles, helping gross profit margin. With the company now guiding for 33,000 vehicles in 2014 instead of 35,000, hitting 29% is going to be tough.
Tesla's Fremont factory. Source: Tesla Motors.
In hindsight, the key lesson here is that Tesla's results are extremely dependent on its ability to ramp up production, especially in light of the fact that the company continues to have demand that outstrips supply; so, more conservatism regarding the operational benefits that go along with Tesla's planned increased production could have been healthy on my part.
Still, a 28% gross profit margin for Tesla's automotive business is impressive. Investors should be pleased if Tesla can really pull it off by the end of Q4.
Meanwhile, Tesla's third-quarter automotive gross profit margin came in at a nice 23% despite one-time manufacturing inefficiencies associated with Tesla's transition to a new final assembly line and international revenue that was pressured by the U.S. dollar, which negatively affected gross margin by about 400 basis points.
Bet No. 2: Competition will launch a fully electric competitor to the Model S
"The Model S was a blockbuster success. Competitors won't sit around lethargically very long," I wrote at the beginning of the year.
Boy, was I wrong. No formidable competitor has launched anything of the sort. The fully electric luxury car market still belongs completely to Tesla.
Meanwhile, demand for Tesla's Model S is as hot as ever. Tesla has clearly proven that electric cars resonate with customers. The company is on pace to sell 46% more Model S vehicles than it did the year before. Furthermore, it's predicting year-over-year sales growth in the company's fourth quarter of 89%, or 44% higher deliveries than in any other quarter.
You would think this would inspire imitation in the auto industry.
Tesla CEO Elon Musk is surprised, too: "I had thought the big car companies would be coming out with electric cars sooner," Musk said in an interview last month at GQ magazine. "Crazy thing is, it's now seven years since we unveiled the Roadster, and yet there's still not a single car for sale without a Tesla badge that has a 250-mile range. That's mind-blowing."
Will 2015 will be the year Tesla's true competition will finally be unveiled?
As a Tesla shareholder, I believe fully electric competition will be beneficial to overall adoption of electric vehicles over the long haul and serve as a catalyst for Tesla. So, I'm hoping for some interesting competition. Tesla could use a competitor-inspired boost in electric vehicle interest.
Perhaps it's competitors' unwillingness to give Tesla an official stamp of approval for fully electric vehicles by building their own 250-mile range version that has them holding back.
Bet No. 3: Tesla's demand will continue to outstrip supply
As predicted, the electric-car maker continues to see demand outstrip supply. Yet Tesla still hasn't spent a dime on any paid advertising, and its retail footprint -- even in established markets -- is still incredibly small. And consumer education across all of Tesla's markets about its vehicles and its rapidly growing Supercharger network is still less than rudimentary.
Tesla retail store. Source: Tesla Motors.
Still, production continues to be Tesla's limiting factor.
"We're just not pulling the levers that we could pull because there is no point in trying to amplify demand substantially beyond our ability to produce it and deliver it," Musk explained in the company's third-quarter earnings call.
Despite the fact that Tesla still isn't putting considerable effort into selling its vehicles, the company is so confident in demand that management predictedin its Q3 letter to shareholders that Model S deliveries will grow by 50% in 2015 "and for several years to follow." As production grows, Tesla contends that demand will continue to be ample.
