As share prices rocketed up faster than a Model S goes from 0 to 60, investors, like me, who missed out were left in the dust. All hope is not lost for us however. There could be some speed bumps ahead that present good buying opportunities. Meanwhile, the long-term outlook for the company looks brighter than ever.
Margin
Gross margin improved 9% sequentially last quarter to 17%. Tesla Motors Inc (NASDAQ:TSLA)’s goal is to reach 25% gross margin by the end of the year. This will be closely scrutinized going forward as the company has already made many improvements in terms of efficiency, and faces several challenges going forward.
It took the company 40% less time to build a Model S in March compared to December. As manufacturing efficiency ramps up, the savings will drop off after the company can avoid paying workers overtime.
It will also improve margins through reducing costs from third-party suppliers. Many suppliers were timid regarding Tesla Motors Inc (NASDAQ:TSLA)’s ability to move cars, but after selling 4900 Model S’s and increasing its forecast by 1,000 more vehicles, scale ought to help reduce contract prices.
But a change in product mix will hinder margins in the short term. The company expects to sell more of its newer low-end 60 kWh battery pack cars going forward.
Additionally, a decrease in the amount of Zero Emission Vehicle credits the company receives as a percentage of revenue will impact margin numbers as well. As a result, the company expects this quarter’s gross margin to come in at a similar high-teens figure.
Nonetheless, last quarter’s 17% gross margin compares favorably with other car manufacturers. Toyota Motor Corporation (ADR) (NYSE:TM) grossed 11.8% of revenue in 2012. General Motors Company (NYSE:GM) had a gross margin of just 10.6% in its most recent quarter.
Even luxury automakers, with which Tesla Motors Inc (NASDAQ:TSLA) competes more directly, have only slightly better margins. BMW’s automotive segment reported gross margin of 18.1% last quarter and 20.2% in 2012. Audi reported gross margin of 19.9% in 2012.
Improving gross margin to 25% would put Tesla Motors Inc (NASDAQ:TSLA) well ahead of the competition. It also means that last quarter’s profits are pretty small compared to what’s to come.
Zero-emission vehicle credits
Zero-emission vehicle credits brought in $68 million of the company’s $562 million in revenue through government subsidies. No other auto manufacturer enjoys nearly the same advantage, and it’s likely Tesla Motors Inc (NASDAQ:TSLA) wouldn’t have made it this far without such subsidies.
Going forward, however, the company will likely see this number shrink as a percentage of revenue. Credits apply to about one-half of U.S. vehicle shipments, but as the company expands globally, it expects that number to fall to one-sixth of total shipments.
Despite the fact that Tesla Motors Inc (NASDAQ:TSLA) will continue receiving these ZEV credits for some time, the company does not factor the income into its gross margin expectations. In fact, it’s taking a very pessimistic view regarding these credits, and doesn’t expect them to be material to its business going forward.
Still, analysts project the company could receive close to another $100 million over the rest of the year – all going straight to the company’s bottom line.
New Models
The company expects its research and development costs to increase next quarter as the company ramps up development of its next line of cars – the Model X. While the Model X and increased exposure will improve sales next year, I don’t expect its sales to take off until the third-generation models hit the market.
Earlier this year, Elon Musk hinted at a third-generation model priced to compete with entry-level luxury sedans. Such a car may be less luxurious than Tesla’s current Model S, but at half the price it becomes accessible to a much larger crowd.
Compare BMW’s 3-series, which sold nearly 100,000 units last year, to the 7-series, which sold just 11,000. The market for an entry-level luxury sedan from Tesla Motors Inc (NASDAQ:TSLA) is likely 5 to 10 times greater than the Model S and Model X. That market would be mostly additive as well.
Competition
When you factor in the fuel savings of an electric vehicle, a $30,000 Tesla Motors Inc (NASDAQ:TSLA) model can compete with some of Toyota Motor Corporation (ADR) (NYSE:TM)’s best-selling mid-range cars like the Camry and Prius. And while Toyota might not be the target for Tesla, the Japanese automaker should pay close attention as it enters the electric vehicle market.
The bare-bones Prius Plug-In currently costs $32,000 and is equipped with just a 4.4 kWh battery pack, which provides about 11 miles of gas-free driving per charge. That’s extremely underwhelming compared to the Model S’s range of 260 miles, and the potential for the third-generation entry-level model to provide a similar range. While it does have a gas engine for backup, Tesla’s cars simply have a large enough range to forgo gasoline altogether.
General Motors Company (NYSE:GM)’s Chevy Volt is another potential target for the third-generation Tesla Motors Inc (NASDAQ:TSLA) models. Currently selling for more than $39,000, the car comes with a battery that provides an estimated 38-mile range. The price needs to come down further, and the battery range needs to increase if General Motors Company (NYSE:GM) wants to maintain its No. 1 position in the growing electric vehicle market.
In fact, that position already appears in jeopardy as Tesla Motors Inc (NASDAQ:TSLA)’s Model S sales last quarter outperformed the 4,400 Volts sold during the same period.
The point is Tesla has the potential to build cars that compete on both the high-end and the low-end, and take sales away from not just other electric vehicle manufacturers, but traditional gas-powered automakers as well.
Outlook
The long-term outlook for Tesla is very strong. Its technology is years ahead of other manufacturers’, and the demand for more cost-efficient vehicles rises with the cost of gasoline. The International Energy Agency expects 15% of the world’s vehicle fleet to be made up of electric vehicles by 2030. Tesla Motors Inc (NASDAQ:TSLA) is the clear leader on the high end, an entry-level model will help solidify its position in the space.
In the short term, there will likely be a better buying opportunity. It’s hard to recommend a stock right after its shares increase 30% in one day. The company still has work to do to prove it can reach 25% gross margin, and decreasing ZEV credits could put pressure on the stock price. That said, I wouldn’t want to miss out if a buying opportunity presents itself.
The article The Road Ahead for Tesla Motors originally appeared on Fool.com.
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