Just a few weeks ago, shares of Tesla Motors Inc (NASDAQ:TSLA) were having a tough time breaking through the psychologically-created resistance around the $40 per share level. But since then a flurry of good news has come out for Tesla with hints at more in the future. As a result, shares are up over 37% over the last month as buyers enter the market for this Silicon Valley automaker. As of this writing, Tesla shares just broke through the $50 level to close at $50.19 per share on Apr. 22. While there will likely be more movement in the share price over the next few days, it is important to look at what may have driven Tesla this far and whether there is still room to run.
Profitability
On Apr. 1, the Street began to trade the news that Tesla Motors Inc (NASDAQ:TSLA) would report profitability on both a GAAP and non-GAAP basis for Q1 2013. Shares shot up around 20% to peak at $46.68 before falling back into the $44 range and closing up nearly 16%. For most companies, an announcement of profitability wouldn’t be that special. But Tesla is not “most companies.” As a start-up in the capital-intensive automotive industry, Tesla Motors Inc (NASDAQ:TSLA) was burning through millions of investor dollars to bring its Roadster and Model S from the drawing board to production.
The spending of mass amounts of money to develop a car is not unique to Tesla though. General Motors Company (NYSE:GM) spent millions to develop the Chevrolet Volt and Toyota Motor Corporation (ADR) (NYSE:TM) spent millions to develop the original Prius and millions more per year to refresh the model. The difference between how auto development affects major automakers like General Motors Company (NYSE:GM) and Toyota Motor Corporation (ADR) (NYSE:TM) and start-ups like Tesla Motors Inc (NASDAQ:TSLA) is access to capital for funding development projects. General Motors Company (NYSE:GM) and Toyota Motor Corporation (ADR) (NYSE:TM) allocate a portion of revenues, which run well into the billions, for the development of many different models to keep their entire product line fresh. The major automakers even go as far as to lose money on vehicles with new technology when they are first introduced as part of a real world testing program. But Tesla does not have billions in revenues and must use funds raised from investors and the relatively small amount the automaker has earned by selling its vehicles.
Needless to say, this results in a very difficult situation. Not using enough development dollars would create an unsellable shoddy product while using too many development dollars would bankrupt Tesla before it could roll out production. Estimates on developing the Model S (Tesla’s first car designed entirely by Tesla), put the development cost near $1 billion. With so much money used up, much of the investing community was beginning to associate Tesla with perpetual cash burning which would lead to a Solyndra-like bankruptcy.
Tesla CEO Elon Musk’s announcement of Q1 profitability reassured the investing community that not only was their light at the end of the tunnel, but the tunnel was much shorter than they previously thought. The announcement both lessened fears and gave an update of Tesla’s progress by showing they would exceed delivery targets for Q1 by about 250 Model Ss.
More announcements
When the profitability announcement was made, Musk was pretty clear that more announcements were to follow over the coming weeks. However, the next Tesla announcement failed to live up to the hype it inspired. The announcement was a new financing deal Tesla had established whereby potential owners could get a Model S for only $500 per month. The price sounds great on the surface but even Tesla bulls like myself realize that it was more of a marketing technique than a true innovation by Tesla. As a result, shares were hit hard after the announcement failed to live up to expectations; however, they were able to stay above the $40 mark that had taken so long to break.
Going forward, Musk has hinted at more announcements. As of now, it remains a mystery as to what he will say, but many buyers could be entering the stock hoping to take advantage of gains resulting from these announcements. At this point, it is impossible to tell just how many of these announcements are priced into the stock. Over the coming weeks, we should begin to get a better feel for what secret goodies are lurking behind the scenes at Tesla.
