Tesla Motors: Demand Will Drive Revenue And Margins

  • Tesla is facing strong demand for its cars amid product constraints.
  • The company intends to expand charging networks in China to spur growth in the market.
  • Tesla to spend more in capital projects in 2015 than last year.
  • Profit margins to improve significantly once Gigafactory kicks to operation.

Tesla Motors (NASDAQ:TSLA) is a manufacturer of green cars that run on lithium-ion battery cells. The company currently sells a single model of such a car known as Model S. There is a massive demand for the car, but Tesla is currently unable to manufacture enough cars to meet that growing demand. At a conference in Detroit early last year, Tesla’s CEO, Elon Musk, estimated that they target to sell over a million vehicles a year by 2025.

Markets Currently Covered

Tesla Motors is witnessing rapid demand in the markets where it has already introduced its flagship Model S. In addition to North America, Tesla sells Model S in Europe and China. In the fourth quarter of 2014, North America accounted for 55% of the total deliveries while Europe accounted for 30% and the rest of the sales were made in the Asia Pacific region. Tesla started selling Model S in China last April and demand has been growing rapidly with the company witnessing shortages in some markets.

Demand Drivers

The demand for cars that run on green energy has been riding on the back of Government sponsorships and favorable regulations amongst other key drivers. Tesla has been taking advantage of these opportunities to boost sales, and the opportunity still remains hugely untapped. In China, for instance, efforts to control air quality have seen the government implementing attractive subsidies for electric and hybrid cars purchase in the country. Tesla plans to expand its market in China by building more recharge stations and introducing new cars.

Key Figures

Tesla production figures

Tesla Motors reported $956.6 million of revenue for Q4 from the sale of 9,834 cars, more than 6,892 vehicles sold in the same quarter a year earlier and 7,785 cars sold in Q3. Sales for the whole year 2014 were 32,733 cars, almost hitting its ambitious target of 33,000 cars for the year. Unlike the gasoline automakers out there, Tesla is not struggling with a shortage of demand. The key concern of the company is currently that it is not able to deliver enough cars to the market, which is more of an opportunity in disguise.

Tesla finished the year with 10,000 bookings for Model S and 20,000 orders for the upcoming Model X. The company anticipates delivering 55,000 vehicles in 2015. The coming Model X SUV and the improved all-wheel Model S are expected to drive sales this year.

Concerns in China

China emerged as a particularly problem market for Tesla in 2014. Mr. Musk remarked that Tesla Q4 sales in the country were slower than expected. Interestingly, the reason is not a lack of demand in China, but Chinese drivers are concerned about the availability of charging stations, which is even arising from poor communication. Nonetheless, expanding the charging infrastructure is one of the plans that the company has for this year, which should help drive more sales in the market.

Capital Expenditure

Tesla Motors announced plans to spend a “staggering amount of money” this year on capital expenditures and research and development. The company said it plans to swell its spending by 50% this year, which means about $1.5 billion in 2015. While Tesla’s huge spending may be an issue of concern for some investors, but it should be well understood that these massive investments will pay off sooner rather than later. The company will be able to burn cash over the next 12 or 18 months, but that is not a big deal given that Tesla will emerge stronger, and the wait will be worthwhile to the patient investors.

Tesla capital expenditure

This year, expect Tesla to spend on expanding its production and possibly double the numbers of cars it produces per week. Tesla currently manufactures 1,000 cars in a week and it should be able to produce twice as many cars by the end of the year.

Other Spending Areas in 2015

Preparation for the rollout of the next car, Model X, expanding sales stores and service center locations and spending on the Gigafactory are also some of the other areas that Tesla will need to invest more money this year. The wonderful thing here is that the company is able to invest this staggering amount of money this year without turning to the capital market for fundraising.

Tesla Profit Margins

The major cost problem for Tesla currently is battery cells, but the company should be able to register significant cost benefits once its $5 billion Gigafactory facility in Nevada starts production in 2017. However, Tesla was still able to improve its profit margins in Q4 compared to the same period a year ago to 34.46% of gross margin and -11.25% of net profit margin. While the margins are currently undesirable, there is a huge room for improvement when the Gigafactory comes online.

Factory operating below capacity

Tesla Motors doesn't seem sincere about its claims of production constraints. The company’s production plant has been operating below capacity in the past quarters and is expected to run below capacity in the current quarter. Although the company has claimed that it is able to produce 1,000 cars per week, it produced just 850 cars per week in Q4 2014, representing 88.5% of factory capacity. That compared to 88.7% and 96.3% of factory capacity in 3Q2014 and Q2 2014, respectively. In the current quarter, Tesla's production guidance of 10,000 cars shows that it will produce 843 cars per week, representing 84.3% of the factory capacity.

The fact that Tesla Motors is operating its production factory below capacity yet it claims to be facing overwhelming demand for its cars raises more questions than answers. If Tesla is throttling production, perhaps the demand is not there, contrary to its claims.


There is massive demand for Tesla Motors' new vehicles. Profit margins will go up when the company starts producing its own battery cells from the Gigafactory in Nevada. Direct sale model that Tesla uses also allows the company to
maintain high margins.

To know more about Tesla Motors, watch Amigobulls Tesla stock analysis

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