Is Tesla the auto manufacturer of the future, or a very risky bet?

tesla motors logoI must admit, I have a soft spot for Tesla. The electric car manufacturer is headed up by South African-born entrepreneur and real-life Tony Stark Elon Musk, whom I find fascinating and inspiring, and it is the first company to take electric cars really seriously, as a viable alternative to petrol-powered vehicles.

It produces a gorgeous-looking sedan that is fully electric, yet gets almost as many kilometres per charge as a regular sedan get per tank of petrol (most electric cars have much shorter ranges). It has produced a sassy sports car, and has plans to introduce a fully electric sexy sedan-SUV hybrid – in other words, a nice range of vehicles that are all completely electric and emission free. It’s an amazing company.

That said, the Tesla story is not uncomplicated. The company faces a lot of challenges, as illustrated by its Q1 results, which were released on Wednesday.

On the face of it, the results were solid. The company delivered 6457 of its Model S cars, beating its earlier guidance for deliveries. In non-GAAP terms, it earned a net income of $17m, up 10% from March last year, but down 63% from the three months ended December (reflecting the cyclicality of car sales and rising costs). Non-GAAP revenues were up 27% from March last year, and the non-GAAP gross margin on car sales was a respectable 25.4% (select financial information in table below).

However, while the results were respectable enough, they also highlighted a number of challenges. First up is the issue of rising costs. Although the cost-of-sales remained steady, research and development and sales and admin costs increased substantially (R&D costs were up almost 20%, sales and admin costs rose by almost 16%). These increases reflect the investment the company is making in its Model X SUV-sedan hybrid, as well as the costs of entering China and building a new battery factory – the entrance into China is generally seen as a positive, although the Q1 results do not yet include any China sales figures. Given that Tesla is still a developing company, rising costs are to be expected. However, investors seem concerned that the increased costs are not yet being rewarded with rising sales or profits.

A second issue is that of supply constraints.  In Q1, Tesla produced a record number of its Model S cars – 7535 in all – but investors remain concerned that capacity constraints will prevent Tesla from scaling up quickly enough to satisfy demand and fend of competitors like the BMW i8 and the Mercedes B-Class Electric Drive. Demand for electric cars is rising sharply, but Tesla has only been able to produce around 7000 cars per quarter, not enough to meet rising demand (in China, there are reportedly 5-month waitlists for the Model S). Consumers may get tired of waiting and look elsewhere, and as other manufacturers begin to take electric seriously, this could threaten Tesla’s potential dominance of the sector. Tesla is investing in capacity, including the abovementioned battery factory, a $5bn “Gigafactory” in partnership with Panasonic, and says it plans to produce and sell 35000 cars by the end of the year, an increase of 55% from last year. Nevertheless, investors would like to see evidence of its ability to scale up and meet demand.

A third area of concern is the Tesla support network. Tesla needs to develop an extensive network of charging stations (think petrol stations) in order to make its cars driveable around the world. Tesla must also find ways to develop its sales network, especially after it was dealt a blow in New Jersey when new rules were passed requiring cars to be sold through a middleman, instead of directly (a crazy rule, but there it is).

These challenges seem to have combined to give investors pause – Tesla shares fell about 7% after the results were released, undoing some of the year’s upward momentum. Nevertheless, despite teething problems, Tesla is an exciting company with an attractive product and sensible strategic plans for the future. South African investors can buy Tesla shares through platforms like Standard Bank’s Webtrader (for more, see here).

tesla table

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