Tesla Motors: Why Investors Should Remain Cautious

Tesla Motors (TSLA) recently released its latest round of lukewarm second-quarter. It reported an unadjusted loss of $184 million on GAAP revenue of $955 million. In fact, Tesla's loss for the three months ended June 30 almost tripled as compared to a loss of $61.9 million in the same period last year.

Its automotive department had reported non-GAAP revenue of $1.12 billion, comprising GAAP Automotive revenue of $878 million along with a net increase of $242 million in deferred revenue and other long-term liabilities as a result of lease accounting.

For EV makers, automotive revenue also includes Zero Emission Vehicle credits, which amounted to $14 million for Tesla.

Margin issues are hurting Tesla

Excluding ZEV credits, the non-GAAP automotive gross margin was 23.9%, about 100 basis points short of guidance. The company quoted higher manufacturing and part costs related to the ramp of its "small drive unit line and the deferral of revenue recognition" for certain Autopilot features as reasons for this shortfall in margin.

Model S deliveries through the quarter were a record 11,532 units, in line with the target of approximately 11,507 units. However, the average selling price of the Model S declined due to a shift in product mix away from the P85D.

Some more concerns

Tesla plans to produce slightly over 12,000 vehicles during the current quarter, representing a 60% increase from last year. The company has reduced its full-year delivery target of 55,000 Model S units to 50,000 units, including some of Model X. Tesla plans to start delivering the Model X SUV by the end of next month. Tesla Motors attributes this revision of target to "many dependencies that could influence our Q4 production and deliveries." Since the Model S and the Model X share the same general assembly line, production challenges related to the SUV might have a negative impact on Model S production as well.

But, an analysis of Tesla Motors' sales performance up to now reveals that its full year target, even after the revision, is quite optimistic. Globally, Tesla has sold 10,045 units of the Model S in the first quarter of this year and 11,532 units in the second quarter. This brings the total to 21,577 units for the first 6 months. It sold 1,600 Model S units in the U.S. in July. Since it sells about 55% of its vehicles in North America, we can take a rough optimistic estimate that Tesla would have sold around 3,000 Model S units globally in July.

This takes the global total to 24,577 units. Now, with only 5 months left in the year, Tesla needs to sell at the rate of more than 5,000 units a month, something that it has never done. To make this possible, the Model X has to be the best ever selling EV right from the beginning.

Future plans

Going forward in the year, Tesla Motors expects a decline in the average selling price of the Model S by more than 100 basis points in the third quarter as the dollar has continued to strengthen against most currencies in the markets where the company operates. Also, a shift in its delivery mix towards the lower priced 70 and 70D models will have an effect on the average price. Tesla plans to address this issue with lower production costs. Still, a drop in the gross profit margin should be expected in the next quarter.

Tesla Motors is also developing two other sources of revenue for the future, namely leasing services and Tesla Energy products. In the third quarter, it expects to directly lease about the same percentage of cars that it did in the second quarter. Meanwhile, the production of Tesla Energy products is also expected to start at the Fremont factory in the current quarter, with a plan to ramp up production in the fourth quarter. The Energy battery module and pack production will also be expanded at the Gigafactory toward the beginning of next year.


Tesla Motors' tepid earnings in the second quarter indicate that the company's financial performance might remain under pressure for the rest of the year. Though the company is trying to build ancillary sources of revenue, a drop in the average selling price and higher cost of its cars will have an adverse impact on the bottom line. Thus, investors should remain cautious about Tesla Motors in the second half of the year as the company is grappling with short-term uncertainty.

Published on Aug 15, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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