Since the very first Model T rolled off the assembly line, cars have been the embodiment of everything it means to be American. Freedom, self-sufficiency, the open road and the adventure and discovery are all encapsulated in the car. The 50’s saw factories that had once produced tanks and bombs falling idle, and it was this excess capacity, along with a rapidly growing middle class, that led to the great American Dream including a car in every garage.
Fast forward to 2014, and the humble automobile has come a very long way indeed. Electric motors, fuel efficiency and celebrity endorsements now all are part of the mix. At it’s heart though, the car remains a simple invention that every American dreams of owning, and perhaps that goes some of the way to explaining the amount of time and space that is devoted to covering Tesla Motors (TSLA). Few stocks generate as many column inches, few stocks are reported in such incredible detail, and few stocks can claim that their executives are celebrities in their own right.
All of that is true of Tesla Motors. With the stock accelerating from the last time we covered it in December from $137 to $220 the purpose of the following is to have a good look at the business behind all that hype and answer what’s under the hood at Tesla Motors?
The Company and Business Model
It’s tempting to brand Tesla Motors as a car company and move on. Car companies are easy to understand, and the United States has a great track record of producing them. So what parts of the Tesla business model looks like a stock standard car manufacturer?
Well, first of all, they are responsible for their own vehicles. This means that from initial concept drawing to first sale, the company internalizes all of these functions. That takes in a huge range of activities including design, development, prototyping, testing, large scale manufacturing, sales and marketing. And, like your friendly neighborhood Ford dealer, they also provide after sales servicing from any one of their 42 stores countrywide.
But that’s not the end of the story; the other parts of the business are far from conventional. Every person who has glanced at a Tesla knows they are different. That point of difference comes from one simple piece of substitution. The dirty, fuel burning, polluting and expensive internal combustion engine that has powered billions of cars worldwide is replaced by a patented and trademarked, clean, efficient and economical electric vehicle power train.
The company also sells this technology to other manufacturers, and does some research and development work in conjunction with other large car manufacturers. At its core though, it’s a car company. It makes money by creating cars that people want to buy; it’s just driven by a completely different engine and set of demand factors than any other car maker on Earth.
Financial Facts and Figures
Those differences seem to be gaining some traction. In the most recently disclosed results, Tesla Motors (TSLA) was able to trumpet an all time high of 6892 Model S vehicles sold and delivered. If you think that number sounds small, you’re right, but it compares well to every other fledgling car company that has tried and failed in the last century to challenge the might of the industry leaders.
Perhaps most pleasing financially was the increase in margins achieved for those units, which exceeded expectations at 25.8%. The good news kept coming with the flagship Model S the bestselling car in it’s category (price wise) and total sales eclipsing the mammoth $2 billion mark for the year, helped along by a revenue spike in the last quarter to $761 million, up 26% on the previous quarter.
As with all car companies, the real test for Tesla is whether it can consistently deliver cars that the public is willing to pay for. It has forecast ambitious targets of over 35,000 Model S’s sold for the calendar year, and is also predicting that further margin expansion to 28% is achievable as economies of scale begin to kick in. if it is able to do both these things it will be in the incredibly strong position of being able to grow it’s sales and expand it’s margins at the same time. The other measures of the company are also strong with customer satisfaction being the highest of any measured car and the environmental benefits undeniable in the face of poorer air quality in many parts of the globe.
The company is also continuing to invest in many areas. The most important are it’s research and development arm, which ensures that the next model is continually in development, which at this stage is tentatively named the Model X. The other major area of expenditure is growing the store footprint, which allows access to greater markets both domestically and internationally. The final area of increased spending is the infrastructure, both in terms of the charger network (needed to power the cars) and the Tesla Gigafactory, which is an innovation designed to slash operating costs by reducing the unit cost of each battery pack that the Tesla cars must carry.
The reputation of Tesla and their future success depends on the ability to deliver a safe, novel and efficient driving experience consistently, a feat that is achievable given the above initiatives.
Tesla Motors (TSLA) has successfully overcome the first hurdle of moving from being a novelty and “science project” type company into a profitable car manufacturer. Gaining traction and winning market share from the automotive giants will be challenging, but even 1% of the multi-trillion dollar a year car industry would lift the company to incredible new heights, both in terms of profit and stock price.
We had price target of $250 for TSLA which we think will hit today so we are raising our target to $325