Tesla Motors: The Drop Is a Buying Opportunity
The past month has been difficult for Tesla Motors' (TSLA) shareholders as the stock has lost over 15% of its market capitalization. Apart from the broad market crash, the drop in Tesla's stock price can also be attributed to the issue of new shares by the company, which could lead to earnings and share price dilution. But, investors should not ignore that Tesla is issuing new shares in order to raise capital to invest in its business in the long run. As such, I think that investors should consider using Tesla's drop to buy more shares.
Impressive sales growth will continue due to fresh investments
Tesla's Model S has gained strong traction after the introduction of the 70D and 85D models. In the U.S., the orders of the Model S grew approximately 30% during the second quarter on a year-over-year basis. Meanwhile, growth in Europe was stronger, with orders for Model S expanding 50% year-over-year despite a couple of price hikes in the last six months. This indicates that the acceptance of Tesla's Model S is strong as customers are willing to pay a premium for the model.
Moreover, in Asia, orders for the Model S almost doubled in the second quarter, driven by the successful implementation of its new China strategy. Being encouraged by this growth, Tesla is making new investments in China as it will expand from one to five retail stores situated in posh locations.
A key reason behind Tesla's impressive sales growth, apart from an improving infrastructure, can be attributed to the improvements that the company is making to its cars. For example, in July, Tesla announced product improvements to widen the appeal of the Model S. The company launched the Model S 70 with a beginning price of just $70,000. If we include projected fuel savings and incentives, the initial price of the vehicle will drop down to approximately $50,000 in the U.S., allowing Tesla to increase its reach.
In addition, for performance geeks, the Ludicrous mode will enhance the vehicle's 0 to 60 mph acceleration to just 2.8 seconds. Further, the existing P85D customers are also provided with an option to upgrade to the Ludicrous mode. Hence, Tesla is catering to both the budget electric car buyer and the auto enthusiast, which will help it win more customers going forward.
In addition, Tesla Motors has also launched referral and pre-owned car plans, which will allow many more customers to come into Tesla's fold. This referral program can be taken as a trial, which the company lately recently to check if it can return the cost of its sales to its customers.
As mentioned earlier, Tesla Motors recently raised more cash from the stock market. Investors should see this stock offering in the right spirit as the company will utilize the proceeds from the transaction to enhance the growth of its business in the U.S. and globally. This includes the expansion of its Tesla Energy business, the Supercharger network, service centers and stores. Moreover, the company will also receive a shot in the arm for the production and advancement of the Model 3 with the new funds, which is a budget offering that will help Tesla increase its penetration on a global basis.
As a result of these moves, it is not surprising to see that Tesla Motors is confident of sustaining its growth going forward. The company's production guidance for the third quarter is for 12,000 vehicles, depicting an increase of over 60% as compared to last year. This will include certain Model X deliveries as well, which is Tesla's new SUV. In fact, this rate of production for the ongoing quarter is consistent with the second quarter.
Tesla Motors produced 12,807 vehicles last quarter, surpassing its target of 12,500 vehicles and representing a 46% growth in production over last year. Moreover, the company's deliveries of 11,532 Model S units last quarter exceeded its earlier target slightly, and the introduction of the Model X means that Tesla's sales will gain further momentum. Thus, the company is doing the right thing by increasing its production.
Keeping in mind the points discussed above, I think that now is a good time for investors to buy Tesla Motors shares. The introduction of new models, the expansion of its network into more countries, and its new energy products will act as growth drivers going forward. Hence, in my opinion, it will be a good idea to take advantage of Tesla's drop so far this year and buy more shares.