Tesla Motors Inc (NASDAQ:TSLA) recently turned profitable for the first time since its inception 10 years ago. I believe it will grow to become a strong player in the global auto industry, but not at a very fast pace. The electric car industry is in the growth phase, and so is the demand for Tesla’s cars. Let’s see if there are any catalysts in play that will enable the company to post another profitable quarter.
Tesla Motors Inc (NASDAQ:TSLA) was founded in 2003 and is headquartered in Palo Alto, CA. It designs, develops, manufactures and sells electric cars and electric vehicle power-train components. The company sells its cars through 32 Tesla stores in North America, Europe and Asia. The electric-automaker’s stock recently jumped to $100 for the first time.
A significant development
In the first quarter of 2013, Tesla Motors Inc (NASDAQ:TSLA) reported record high revenue of $562 million, up 83% from the last quarter. This increase in revenue was largely driven by the sale of 4,900 Model-S vehicles, which beat the company’s forecast of 4,500 vehicles. Tesla earned 12% of its revenue from the sale of a zero-emission vehicle (ZEV) credits to other automakers, but the company expects a decline in this segment in the future.
One of the interesting items in Tesla’s latest financial disclosures is the significant contribution made by other income. Other income came in at $17 million, compared to $0.8 million in the last quarter of 2012. This is particularly important when the company made only $11 million in net profit and had a loss from operations of $5.5 million during the first quarter.
This huge contribution from other income is due to a reduction in fair value of the Department of Energy (DOE) warranty liability of $10.7 million. The rest is from favorable foreign currency-exchange impacts. Both of these items are considered one-time items and will not appear every year. Adjusting for other income, the company posted a $5.7 million loss at the end of the first quarter.
The company’s gross profit margin improved from 7.7% to 17% over the previous quarter, and the company expects to post a gross margin of 25% in the fourth quarter of 2013. At the same time, it expects an increase in operating and R&D expenses in the current quarter of 2013. Therefore, the target might be considered too ambitious.
By 2014, analysts expect Tesla Motors Inc (NASDAQ:TSLA) to produce a net profit margin of around 5.2%, which I believe can be achieved if the company improves its production. For this purpose, Tesla has set aside $200 million that will be spent on improving the company’s production. Its first-quarter’s net profit margin came in at 2%.
So, I believe even if the $200 million is spent on improving the production facilities, Tesla will require some time to reach the anticipated profit margin figure. On the other hand, other car manufacturing giants like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are operating within the range of 3% to 5% net profit margins.
Future growth
Innovation of the Model S is the main driver for Tesla Motors Inc (NASDAQ:TSLA)’s growth. According to Tesla, the company is receiving more than 20,000 orders per year for its Model S, but it reported a 12.7% reduction in its May sales. Tesla Motors Inc (NASDAQ:TSLA) sold 1,425 cars in May as compared to a monthly average rate of 1,633. Further, high battery costs are a major hindrance to the car’s mass production. The company needs to work rapidly to reduce battery costs if it intends to bring the car to the mass market. Tesla also announced its plan for a lower-priced electric car that will hit the markets in early 2015.
Higher competition from price cuts
Electric-motor cars have a market share of 3.8% , up from 3.4% in 2012. Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) and General Motors Company (NYSE:GM) also increased their focus on making electric cars. Tesla Motors Inc (NASDAQ:TSLA)’s Model S is the most popular electric car and got a highest test score of 90 points out of total 100-point scale. Tesla’s Model S is extremely expensive, with a starting price of $69,900, compared to General Motors Company (NYSE:GM)’ price of $39,145 for the Volt and the Nissan Leaf with a price of $28,800.
Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) announced a price cut for its Leaf by $6,400. Its plant is manufacturing about 2,000 vehicles a month, while Nissan Canada will now offer lower-priced Leaf vehicles beginning next month. Due to eco-friendly actions and Leaf’s positive effect on perceptions of the brand, Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) has been now named the greenest brand in 2013.
General Motors Company (NYSE:GM) announced the reduction in Volt’s price by $4,000 in order to enhance sales, which could affect adversely on Tesla Motors Inc (NASDAQ:TSLA)’s sales. This is not only a price cut but rather an incentive by General Motors Company (NYSE:GM). Customers will be given a $4,000 discount if they buy the new 2013 model of the car, while a $5,000 discount is given to customers who decide to own the 2012 model.
As battery charging is an issue in electric cars, GM and BMW are now working on a technology that will charge 80% of an electric car battery in 20 minutes; the devices, which are designed for charging stations, will cost $20,000 to $30,000 each. GM will launch is the new electric Chevrolet Spark in 2014 and it will cost around $20,000, which will further increase the price war.
While Tesla is targeting a completely different target market with regards to income levels, still any price cuts by its competitors have an adverse impact on its sales. However, Tesla Motors Inc (NASDAQ:TSLA) still remains a top seller of electric cars with sales of 4,900 units of the Model S, beating General Motors Company (NYSE:GM)’ Chevrolet Volt, which had sales of 4,421 and Nissan’s Leaf, which had deliveries of 3,695.
Conclusion
Tesla Motors Inc (NASDAQ:TSLA) posted an unexpected result at the end of the first quarter of 2013. However, I highly doubt that the company will post another profitable quarter. Revenue will be down due to the expected decline in ZEV credits, while the 1Q bottom line was already supported by one-time items, which might not appear again. Therefore, I believe there are no significant positive catalysts that will lead the company to post another profitable quarter.
Red Chip has no position iny any stocks mentioned. The Motley Fool recommends General Motors Company (NYSE:GM) and Tesla Motors . The Motley Fool owns shares of Tesla Motors .
The article Pricing War Threatens Tesla’s Market Share originally appeared on Fool.com.
Red is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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