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.
Building a company
In the end, Tesla Motors Inc (NASDAQ:TSLA)’s goal is to build a world class automaker that can eventually deliver profitable electric vehicles to the masses. CEO Elon Musk owns about a quarter of the outstanding stock and has a series of options that vest only if Tesla shares hit price targets well above current levels. As a long-term investment, we need to take a look at Tesla’s future potential.
Working out of the former NUMMI factory, which used to house a joint venture between GM and Toyota, Tesla’s factory has plenty of capacity as production is ramped up. When the factory was run by GM and Toyota it turned out hundreds of thousands of vehicles per year giving the factory plenty of potential for a start-up like Tesla. Even producing Model Ss at 20,000 per year, much of the factory still remains unused giving Tesla the ability to add the production line for its Model X SUV and the lower cost Gen III sedan. In Musk’s conversations concerning Texas’ dealer franchise laws, he offered the possibility of building a second assembly plant in Texas to assemble an electric pickup. But with plenty of space left at the Tesla Factory (as the company has named the former NUMMI facility), it will likely be much longer before the Tesla pickup comes into existence.
Production of the Model X has already been pushed back as the automaker focuses on Model S production, which is finding a buyer for every car it can produce. But as more models come online, the Tesla Motors Inc (NASDAQ:TSLA) name should begin to generate greater recognition and a more diverse product line should attract a larger customer base. All of this means greater sales that should lead to greater profits thereby providing earnings that can match the automaker’s valuation.
Breaking through $50
It took months and a major announcement about the company’s finances for Tesla stock to finally crack $40 per share. However, it has taken much less time for the stock to pass the $50 per share mark. Breaking this level shows that Tesla shares are not constrained to the $40 range and have the potential to quickly run higher should momentum continue or more positive news be released. While maintaining the $50 level is still up in the air, we will see over the next few weeks how significant the Tesla Motors Inc (NASDAQ:TSLA) announcements are as we watch for continuing execution in Model S production. Combined, these factors could determine whether the next stop is $40 or $60 per share.
The article Tesla at $50, Where to Next? originally appeared on Fool.com and is written by Alexander MacLennan.
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