The future of electric cars is still not certain. However, the future of one electric car manufacturer is, and that is Tesla Motors Inc (NASDAQ:TSLA). The company has improved its financial situation over the past and is ahead of the competition. Let’s see what puts Tesla Motors Inc (NASDAQ:TSLA) ahead of other automaker giants.
The company
Tesla Motors Inc (NASDAQ:TSLA) is a specialty electric car and component manufacturer. The manufacturer of electric cars is built for both sports and mass-markets. To own Tesla’s cars, the company also offers an international financing option.
Improving financials
Tesla Motors Inc (NASDAQ:TSLA) reported a net profit at the end of the first quarter, after accumulating losses for years. First quarter net income came in at $11.3 million, compared to a net loss of around $90 million at the end of the linked quarter. The first quarter adjusted EPS of 12 cents beat estimates of 4 cents. Much of the improvement in the latest financials was due to the highest ratings received by the Model S from Consumer Reports.
These improvements are a milestone for a company that has been at the center of the heated discussions over the future of electric cars.
Catalysts on the horizon
While Tesla Motors Inc (NASDAQ:TSLA) has shown some improvement in its otherwise weak financials, presence of catalysts drives the future performance, and I believe Tesla Motors Inc (NASDAQ:TSLA) is blessed with a few of them.
I believe the recent equity injection will increase the probability of crossing the chasm to the third generation car with an over 200 mile range. Given the equity raise and the resultant reduced financial risk, there is a higher probability that Tesla might move away from a luxury niche (Model S/X) to become a mass affluent third generation manufacturer. Additionally, the improved financial condition at the end of the first quarter is likely to further boost demand as greater international visibility emerges and consumer confidence in vehicle warranties increases. These two factors lead me to believe that Tesla’s financials will continue to improve in the coming quarters.
Besides, Tesla collected $1 billion from debt and equity during the month of May this year after it upsized its previously announced plan of raising $830 million. These upsized funds will help Tesla continue development of the Model X and the future of the third generation product.
Higher margins could improve further
Tesla competes with other US automakers including General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). Both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) operate within the range of 3% to 5% net profit margin. This is in contrast to Tesla as its products are considered luxurious; therefore they are aimed at more affluent customers. This means Tesla can eventually generate higher net profit margins compared to Ford and General Motors.
Analysts expect around 5.16% margins for Tesla by 2014. These margins could improve as the company improves its production. Tesla already has plans to improve its production facilities by investing $200 million.
Not all is well
One headwind Tesla is going to face before its products are adopted by the mass market is battery cost. Despite the cash infusion from the recent debt and equity offerings, battery costs are likely to remain an inhibitor to mass market adoption. Investors must keep an eye on further evidence of battery cost reductions before giving a high probability of mass market adoption. Given the lack of evidence, Barclays PLC (ADR) (NYSE:BCS) continues to assume a 5% chance of mass market adoption.
However, the probability assumption is not shared by Tesla bulls. They assume a 0% chance of a failure, a 70% chance that Tesla will successfully enter the mass market, and a 25% chance that it only gets as far as the third generation product.
Competition
While Tesla is aiming at affluent customers, General Motor is launching the new Chevrolet Spark Electric 2014 model that is aimed at the mass market. The car costs around $20,000, which is very cheap and offers an 82 mile range. Though the design is a bit repulsive, it has won the award for cheapest electric car of the year. So, it’s evident that General Motors is targeting customers that can’t afford luxury, which might cause its profit margins to decrease further.
The Ford Focus Electric gives a range of 76 miles, far less than the 208 miles offered by Tesla’s Model S. Therefore, Tesla appears to be ahead of the competition. However, Ford hopes to improve the range and efficiency of its electric cars. Besides, it’s working to increase the technicians’ capabilities working with electric cars. This will help make long distance travel more viable. However, by the time things improve at Ford, Tesla will have picked up fast.
Conclusion
Despite the presence of automaker giants like Ford and General Motors, Tesla is winning the electric car race by far. Its products offer both better efficiency and range. The recent capital injections will help the company in its future developments. Therefore, I am bullish on Tesla Motors.
Tesla’s plan to disrupt the global auto business has yielded spectacular results. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off?
The article What Puts Tesla Ahead of Other Automaker Giants? originally appeared on Fool.com.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors. Adnan 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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