Sales Growth Forecast Is Fueling Tesla To Drive North

By | September 20, 2013

The genius Nikola Tesla died in poverty but the car named after him is certainly on the way to make its investors well-off. As I look at the ticker, Tesla Motors Inc (TSLA) is pushing a record price of $180 a share, up 9.1% for the day (September 19, 2013) so far. Personally, I was expecting this kind of home run since the FOMC meeting minutes were made public yesterday. Without the much anticipated septaper, where else the darling stocks will head but North?

We all know the history of Tesla and we all appreciate the great vision and great models it has delivered to the market so far. I understand that many already consider this to be a Tulip Mania type trend but I will like to discuss why anyone in sound mind will get in now, at this price level. The trend line suggests that the price action has all the textbook characteristics of a bubble. However, I would like to present what is under the hood, the fundamentals.

The story of Tesla has more similarity to one of those Biotech companies with longer R&D period that end-up producing a drug that will cure a widespread chronic disease. The fact is, Tesla is not a new company; it was founded a decade ago. However, as we all know, the trend kicked in after the company reported a profit for the first time in Q1’13.

Revenue and Gross Profit

Before 2013 Tesla’s Revenue was covering R&D and SAG expenses. It actually had an annual gross profit of $30 million. However, EBITDA was -$367 million.

EBITDA Q

Since Q1’13 things drastically changed and in Q2’13 Tesla EPS came out at $0.20, beating industry’s estimated consensus of $0.17. Revenue increased by $378.49 million (YoY) compared to $26.65 in Q2’12. It is rather justified that investors poured into buy Tesla stock as the management estimated to sell 21,000 units including 5,000 Model S by end of 2013.

All that is history and material for case studies to be taught in MBA programs in coming years. However, we are already at the final days of third quarter in the year and we are about to observe where Tesla it is going from here on.

Deutsche Bank seems to have a dedicated analyst for Tesla, their VP of Autos Dan Galves. Mr.Galves was bullish on Tesla back in July and he was right. Today (September 19, 2013) he mentioned that he is expecting Tesla to outperform Q3’13 margin expectations.

Quick Current

Taking a quick look at the difference between current ratio and quick ratio till Q2’13, we can reach the conclusion that Tesla’s inventories accounted for 23.9% of its current assets. So, if Mr. Galves is right “based on monitoring information available on Tesla owners’ blogs” as he said then we must applause Tesla’s sales & marketing team for a job well done to clear that much inventory within a quarter.

Capex

Tesla management spent more than $40 million in capital expenditure in Q2’13, of course Mr. Davis is right to say that production rate is rising to address growing demand. However, the CAPEX is significantly low compared to Q4’12 when they spent more than $80 million. Tesla is currently using an old GM/Toyota (New United Motor Manufacturing, Inc) NUMMI facility in California which has 500,000 units capacity. They are far from producing at full capacity in 2013 so far. Actually, it seems like a overkill to use such a huge capacity to deliver only 21,000 units by end of 2013. The unused capacity is the reason for reducing CAPEX this quarter.

Tesla has a very unique niche market and I believe it is getting saturated every quarter. Tesla obviously believes their current production capacity can meet market demand for at least next few quarters (if not years!). The drop in CAPEX proves that to a certain extent. They are now “shopping” for production facility overseas in Europe and Asia to capture that untapped international “Green” auto market.

ROE

Next, take a look at the operating margin of Tesla which has improved since mid-2012 but still in the negative. Moreover, Return on Capital Employed (-0.28%) seems rather “reasonable” compared to its Return on Equity (-114.9%) in Q2’13. The smaller ROCE just proves the point that Tesla has a lots of unused capacity otherwise ROCE would have been much higher.

Price vs PE ratio

Anyone who shorted Tesla so far in 2013 were severely burned. However, Hedge fund manager and short seller Jim Chanos of Kynikos Associates was happy to share his negative views on Tesla on CNBC this week (September 18, 2013). The interesting aspect for Tesla is that its Beta Coefficient is only 0.69 as far as Yahoo! Finance is concerned (Google Finance listed Beta at 0.51). Having a Beta less than 1 signifies less volatility compared to market which Mr. Chanos seems to be refuting.

I must admit, every time Tesla’s stock price seems vulnerable, its CEO Elon Musk comes out with a tweet for some futuristic idea and then we get another rally. Last time it was “Hyperloop” and this Tuesday (September 17) it was his grand vision to beat Google by putting a fully “auto-pilot” car on the road within three years. He knows how to tickle the market sentiment.

Analysts are expecting Tesla to hit $200. Actually, that forecast came back in May 2013. Regardless of how fundamentals are speaking, as a trader I have always remembered the famous quote from Keynes “Themarket can stay irrational longer than you can stay solvent.” I believe Tesla will actually go beyond $200 based on what I observed today in the market. However, it is perhaps not a very reasonable time to get in unless you already own stocks of Tesla. Most people buying at this price level are either funds (and individuals) with high appetite for risk or others who have already made handsome profits and reverse pyramiding positions. The price volatility is presenting heavenly opportunities for day traders but it is certainly not an investment vehicle for the faint hearted at this point. If you can hold it regardless of the huge +/-10-15% swings then go ahead and buy till sales show any sign of slowing down.

Sales Forecast

Sales figure is actually estimated to grow six fold towards $3 billion by end of 2014 and that’s why I don’t see any reason to question Mr. Dan Galves. Moreover, Tesla CEO Mr.Musk had been telling the media that by his Third-Generation car will hit half a million units in production which is exactly the number (500,000) of their current capacity at NUMMI, California. At least now we know he didn’t overkill by acquiring that capacity and actually believed he will need it someday to meet market demand!

 

Category: Global Macro Stocks Tags: , , , ,

About Asif Imtiaz

Asif worked as a prop trader for almost a decade, and later he managed trading operations for one of the largest foreign exchange strategy developers in Europe. Currently, he works as a trading consultant to several brokers and write on various tech and financial topics as a freelancer. You can reach him at asifimtiaz@vanopulence.com

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