- Tesla earnings for the second quarter showed solid top line growth, but nearly triple the losses.
- The company also lowered its sales guidance for the year.
- Tesla is due to launch Model X in September.
- Unless the new model does exceptionally well, Tesla stock is likely to remain depressed for the rest of the year.
Tesla (NASDAQ: TSLA), widely regarded as one of the world’s best manufacturers of pure electric cars, has reported second quarter fiscal 2015 results. Tesla has constantly churned out a line of marquee models, including the Tesla Model S with its exceptional mileage capability, leaving competing hybrid electric cars from companies such as General Motors (NYSE: GM) and Ford (NYSE: F) lying in the dust. But the company is having an increasingly hard time translating the hype into real sales and profits.
Tesla reported that its sales for the quarter clocked in at $1.2 billion, representing a healthy 40% Y/Y growth and beating consensus estimates by $20 million. The company’s profits, however, were a different story altogether. Tesla’s bottom line, a subject of increased investor attention, slipped deeper in the red after its losses escalated and nearly tripled to $184.3 million, or -$1.45 per share compared to -$0.48 per share during the prior year quarter.
While the wider loss would have been bad enough by itself, Tesla’s lowered revenue guidance provided the final straw. Tesla backed down its earlier sales forecast of 55,000 vehicles for 2015 to a lower range of 50,000-55,000. Quite tellingly, the company remained mute about the expected sales of the new Model X that it plans to launch in September. It was therefore hardly surprising that Tesla shares tanked as much as 8% in after-market trading, as it didn't quite keep up to investor expectations.
There are a few reasons that can be advanced to explain the kind of lackluster demand that Tesla is facing. One of the most important has to do with depressed oil prices. Newer oil extraction technologies such as fracking have led to an oil market awash with oil, and prices have plunged to decade-low levels. Low oil prices act as a disincentive for people who would like to shift to cleaner technologies such as electric-powered vehicles.
The bad part is that many analysts have predicted that global oil prices are likely to remain depressed for maybe another two or three years, which promises to muddy the waters even further for Tesla and other electric car makers.
The second reason for Tesla’s problems can be pinned on poor performance in key markets such as China. Tesla had earlier predicted that China would contribute as much as 35% of its sales by 2014. But this has remained nothing more than a pipe dream. Though Tesla does not break down sales by geographical region, The China Automobile Dealer Association says that the company managed to sell only 2,499 vehicles in China in 2014, or just 7.9% of sales. Tesla’s problems in China have been compounded by the incompatibility of state-owned battery charging stations with Tesla’s charging systems. China Southern Grid and State Grid have a target to open as many as 10,000 battery-charging stations in the country by 2017, all designed for Chinese electric vehicles. Tesla has been trying to get around the problem by building its own battery charging stations in the country, but the build out will take time given that the company has only managed to open 40 stations in 19 cities.
The profit problem
For many years, Tesla’s investors were willing to give the company a free pass as it profits took a back seat. But Wall Street has now become increasingly disgruntled by the company’s practice of low-balling guidance and escalating losses. Tesla’s loss per vehicle sold jumped from $11,000 during the December quarter to $16,000 last quarter. Tesla’s losses are mainly due to rapidly expanding production and its quest for perfection. For instance, CEO Elon Musk is on record saying the Model X’s second-row seats is a ‘‘sculptural work of art’’ which the company has been struggling to get right. Perfection always comes at a price. The company’s increasing investments in markets such as China have also been draining its resources.
As Tesla continues to burn cash, it has resorted to issuing new equity. The company raised $2.3 billion in 2014 after issuing a new round of shares, and there are widespread speculations that it could soon do another round since it has burnt through most of that cash already. This does not bode well for TSLA stock whose valuation already seems to be out of whack compared to its peers.
Source: Deutsche Bank Research
Tesla’s ultra-high valuation is hard to explain even by expected future vehicle and Powerwall sales. Goldman Sachs estimates that Tesla will only be the eighth-largest automaker in the world by 2025, which dispels the notion that electric cars will dominate the market at this time. So growing into that steep valuation is not going to be an easy journey.
Source: Goldman Sachs, HIS
Tesla shares are likely to remain depressed for the remaining part of the year unless the company’s Model X can produce some really stunning sales numbers to offset lower demand for Model S. The performance of the shares in the coming year is also likely to hinge strongly on how well the new model performs. Tesla did not give any estimates for the new model, so at this juncture we can only adopt a wait-and-see attitude.