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Tesla Motors - New Models Equal New Opportunities
Tesla Motors (TSLA) is a unique, technology-driven automotive company. The company was founded in 2003, and became the first publicly-traded pure play electric vehicle manufacturer with its IPO in 2010. Tesla’s focus is on producing innovative electronic vehicles without compromising on performance. The company released its all-electric two-door Roadster in 2008. The Roadster utilizes a Lotus body and chasis, and the combination of a 375-volt AC induction motor and single speed gear box delivers 295 lb-ft of torque and 288 horsepower. It also has a relatively strong range of 245 miles per charge. The light-weight electronic vehicle holds its own with the fastest cars in the world, with 0-60 MPH acceleration in 3.7 seconds and ultra responsive handling. However, with a list price of $109,000 for a small two-seater, the vehicle’s appeal has been limited to a high-end niche market. Tesla has sold more than 2,200 Roadsters, including the updated Sport, 2.0, and 2.5 models, but plans to end production later this year, at 2,500 units. The company intends to reintroduce a third-generation model in 2015, but this will be a much more affordable small vehicle, along the lines of the BMW 3-series, with a price tag in the $30,000 range.
The company has generated excellent brand recognition and credibility with its Roadster, making Tesla synonymous with high performance electric vehicles. However, the market size for the Roadster is way too small to deliver the type of volume needed to support profitability. Management anticipated this early on and planned to eventually launch a pure electronic vehicle platform from the ground up. The company has achieved this development goal, and is on the verge of a launching the innovative Model S platform. The first of these new models, the 4-door Model S sedan is on track for initial delivery this summer. The larger, 4-door Model S is targeted at a much broader market than the Roadster. In addition to its more appealing passenger sedan size, the starting price of $57,400 ($49,900 after a federal tax credit) is more affordable. Moreover, unlike other electronic vehicles that have a significant price premium to comparable gasoline vehicles, the Model S’ pricing is highly competitive to traditional vehicles with similar performance, size, and luxury attributes. Indeed, it offers a similar price/performance value to the BMW 5-series, with the additional benefit of fuel-cost savings. Management has asserted that when factoring in the fuel savings, the vehicle is actually equivalent to a gasoline car priced at $35,000.
The rollout and sales ramp of the Model S represents an important potential turning point for Tesla. The company has received 8,000 reservations ($5,000 deposit) for the vehicle, and consumer interest and demand has continued to climb. Management’s guidance calls for sales of 5,000 vehicles in 2012, following the mid-year launch. The sales ramp is projected to accelerate to 20,000 units in 2013, with a 50/50 split between domestic and international sales. Unlike typical automakers, TSLA is positioned for profitability at relatively low volume levels. Currently, the company generates gross margins in the low-to-mid 20% range on automotive sales, and this is projected to reach 25% as new vehicle sales ramp. Based on the gross margin assumption, and anticipated operating expenses, the company could reach breakeven at approximately 13,000 units. Therefore, even using conservative sales projections, Tesla should turn profitable in 2013.
In addition to the upcoming launch of the Model S, the company recently unveiled the Model X SUV/crossover vehicle. The Model utilizes the same platform and drivetrain as the Model S, and is expected to be similarly priced. The larger SUV will offer an all-wheel drive system, and should help broaden the appeal of Tesla’s model lineup. The vehicle likely won’t be released until late 2013, but reservations have already started to pick up, and the eventual launch should provide a boost to Tesla’s results. Although broad electronic vehicle adoption still faces challenges, the introductions of the innovative Model S platform and these new vehicles should position Tesla for solid performance in the coming years.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.