With Tesla Motors' (NASDAQ:TSLA) fourth-quarter results released recently, investors can look back to see how the electric-car maker performed in 2014. It has undoubtedly been quite a ride. Given Tesla's fast pace in expanding its business, it's a good idea for investors to check in on the company's progress by examining a few hard figures. While a number of useful metrics are useful in articulating Tesla's story, these four are among the most relevant.
Growth was the underlying storyline for Tesla in 2014 -- as it should have been. Growth is what Tesla CEO Elon Musk has preached to investors, and growth is what Tesla guided for last year.
While Tesla did, indeed, deliver some impressive sales growth, it was not as notable as the company had predicted. In Tesla's 2013 fourth-quarter letter to shareholders, management predicted the company would deliver 35,000 vehicles in 2014, which would have been about 55% higher than its 22,500 deliveries in 2013. Instead, Tesla delivered about 31,700.
If the 2014 shortfall in vehicle deliveries was related to demand, it could be a red flag. Fortunately, demand continues to be a boon for the company: Tesla entered 2015 with more than 10,000 orders for its Model S, even as it continues to not spend any money on advertising. Production issues prevented Tesla from reaching its 2014 guidance.
Of course, investors shouldn't ignore Tesla's inability to live up to its own guidance in 2014; if this pattern persists, investors would have reason to doubt the company's future guidance. So far, though, there is no pattern of shortfalls. In 2013, Tesla beat its initial annual guidance for 20,000 deliveries by 2,500 -- an impressive feat considering the company only delivered several thousand vehicles the year before. And for the seven consecutive quarters leading up to the fourth quarter, the company met or exceeded each quarterly guidance.
One misperception about Tesla is that the company is failing because it is not reporting consistent generally accepted accounting principles profits. But for a company growing as fast as Tesla is, and given its track record of heavy spending on growth initiatives such as research and development and capital projects translating to huge revenue growth, investors should want the company to spend every dollar of gross profit it makes on initiatives aimed at growing its business. As long as more upside potential for revenue and gross profit can be captured by investing in business growth, investors should be happy to see heavy spending.
Therefore, instead of looking for GAAP net income as a measure of Tesla's ability to improve operations, investors should track Tesla's ability to continually sell its cars at higher profit margins as it benefits from manufacturing and parts costs efficiencies. Rising gross profit margins are a testimony to Tesla's effective management amid rapid growth.
When it comes to profit margin, Tesla is undoubtedly performing exceptionally well. Excluding the benefits of revenue from zero-emission vehicle credits, Tesla's gross profit margin continued to track upward in 2014.
Tesla predicts this trend will continue in 2015. Specifically, Tesla is targeting a 30% gross profit margin on the Model S of 30% for the fourth quarter. Notably, the company believes these gross margin improvements will be partially offset by the introduction of the Model X in six months.
"Model X gross margin will be suppressed for a few quarters from supply chain and production inefficiencies that are typical of a new product introduction," Tesla management explained in its fourth-quarter letter to shareholders. "Eventually we should be able to grow Model X gross margin to a similar level as Model S."
Tesla gross profit
Vehicle sales are a tangible way to check the pulse of Tesla's growth. But more skeptical investors might prefer a dollar figure.
"Show me the money," they demand. To see growth in the underlying value of Tesla's business, turn to gross profit -- the profit Tesla makes on sales before operating expenses.
If there's any doubt about the growth in Tesla's underlying business, doubt no longer. The company's fourth-quarter gross profit of $262 million was up 57% from the year-ago quarter. Tesla's 2014 gross profit of $882 million was up 93% from the year before.
With vehicle sales, gross profit margin, and gross profit rapidly rising, shouldn't Tesla's stock be headed upward as well? Not necessarily. The market is forward-looking. Growth in Tesla's sales and gross profit in 2014 were expected and priced into the stock. Even more, the market's valuation for Tesla stock is arguably already counting on the company to successfully build and market a lower-cost car by 2017 and to sell hundreds of thousands of units per year.
In the last 12 months, Tesla stock basically went nowhere. This is the unfortunate curse of wide-eyed, rosy expectations.
For Tesla to live up to its valuation, it must prove to investors that it can continue to convert heavy investments in research and development and capital expenditures into upside revenue opportunity. Tesla is particularly spending heavily on its Gigafactory, a $5 billion factory purposed to bring the needed economies of scale to batteries in order for a $35,000 fully electric car to make economic sense for Tesla to market. With the help of the Gigafactory and continued expansion in production capacity, Tesla plans to sell 500,000 cars per year by 2020.
For now, investors will need Tesla to live up to its 2015 guidance for 50,000 Model S and about 5,000 Model X deliveries. After missing its own guidance in 2014, investors need reaffirmation that Tesla is serious about its bold ambitions.