Tesla Motors shocks analysts on last night's earnings call

Tesla Stock
By Chris Umiastowski on 1 Aug 2014 12:30 pm
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Last night, Tesla Motors reported Q2 earnings. The electric car company is making great progress. The quarterly results were solid, which I'll discuss in a moment. But what's more important to me (as a shareholder) is long term direction of the company. They seem poised to become a strong force in bringing electric cars to the masses and perhaps even bringing massive grid-tied energy storage to the industrial and residential markets.

I like the way Tesla runs its quarterly conference calls. They don't waste time reading a press release to listeners. They publish a quarterly shareholder letter and then jump straight into Q&A with analysts. I highly recommend you read their latest shareholder letter

Tesla manufactured 8,763 Model S electric sedans in the quarter. The growth has been nothing short of tremendous. For example, in the same quarter last year Tesla produced a bit more than 5,100 cars. This year they'll deliver more than 35,000 cars to customers and by the end of the year they'll be manufacturing over 1,000 per week. By the end of next year they'll double again producing over 2,000 cars per week. Do the math and you can quickly tell that Tesla will be producing an annualized 100,000 cars per year in just a few more quarters. Considering the average selling price of $100,000 we're talking about a company that will soon be doing $10 billion in revenue per year. That's not a startup anymore.

Tesla manufactured 8,763 Model S electric sedans in the quarter. The growth has been nothing short of tremendous.

Another impressive result out of Tesla is the gross margin they've achieved on the Model S. Last year they disclosed a target margin level of 25%, and they've since surpassed this target. In Q2, reported last night, they reached an automotive gross margin level of 26.8%. Despite significant sales and margin improvements the company doesn't make much money yet. They remind me a lot of Amazon, a company that STILL doesn't post much profit because it prefers (smartly, I think) to re-invest these would-be profits into growth. Tesla, like Amazon and Netflix, has enormous growth ahead of it and shouldn't be short-cutting its future to please Wall Street.

The biggest problem with long range electric cars, today, is the cost of batteries. My car has an 85 kWh battery. For the non-geeks in the audience, a kWh (kiloWatt Hour) is a unit of energy storage that can supply power at 1 kiloWatt for an entire hour. 1 kWh of batteries could run ten incandescent 100W light bulbs for one hour. My car has 85 times this amount of battery storage, which can take the car 265 miles (420 km) on a single charge. This battery (and the motor it drives) also delivers breathtaking acceleration with no engine noise.

But the batteries probably cost Tesla more than $200 per kWh right now. That means the pack costs somewhere in the vicinity of $20,000. Considering Tesla wants to bring the Model 3 to market in 2017 with a base price of $35,000 this cost target might seem impossible, right?

I have a feeling the Tesla Model 3 will come to market with a battery that costs somewhere on the order of $8,000 to build. That should mean the $35,000 target price is very realistic in 2017.

Not so fast. Tesla is building its own soup to nuts battery factory with Panasonic as the main partner. They'll bring raw ore in by railcar at one end and pump out finished battery packs for Tesla cars on the other side. They expect the cost of batteries to drop at least 30%. When asked by an analyst on the call if battery packs could drop to $100 per kWh within ten years, Tesla Chairman and Elon Musk said he'd be extremely disappointed if they were not able to achieve that cost level much sooner. This answer left analysts shocked (in a good way).

I have a feeling the Tesla Model 3 will come to market with a battery that costs somewhere on the order of $8,000 to build. That should mean the $35,000 target price is very realistic in 2017.

Folks … prepare to be driving an uber-cool performance car that is actually affordable for many people. I love that Tesla has brought so much forward thinking to the industry. Every car is Internet connected with built-in Google maps and streaming audio. Every owner can connect to his or her car via a mobile app. Every owner can recharge from well-established electric infrastructure (including in the owner's own garage) for much less than the cost of gasoline.

Between now and 2017 Tesla will also light up the interests of SUV drivers. The Model X SUV comes out next year and I think we'll see even stronger demand for the SUV than the sedan. This means that by by the end of fiscal 2016 Tesla could be producing at the rate of 200,000 vehicles per year, or $20 billion in sales.

As far as the stock is concerned, I'm not selling. I've been a shareholder for over a year and it's been an incredible run. But I think Tesla is redefining the entire industry and positioning themselves to be the lowest cost and highest performing producer of electric cars and electric drivetrains that it can sell to other car companies.

Related: Tesla Editorial

Reader comments

Tesla Motors shocks analysts on last night's earnings call

2 Comments

Excellent article. I've been following Tesla since the latter days of Martin Eberhard's tenure, and still remember a lot of ferocious arguments over the past decade on the viability of an electric car industry (which always ended up being connected to arguments about the viability of solar power). Elon Musk is single-handedly winning all those arguments nowadays. Just wish I'd had the guts, the smarts and the wherewithal to invest in Tesla a few years back.

Great article - and the news on their work with Panasonic on the battery costs speaks volumes about where they are headed. I'm looking forward to selling my two gas powered cars and moving to a model 3 when they're out in 2017.