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Pricing War Threatens Tesla Motors Inc (TSLA)’s Market Share

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Tesla Motors Inc (NASDAQ:TSLA) recently turned profitable for the first time since its inception 10 years ago. I believe it will grow to become a strong player in the global auto industry, but not at a very fast pace. The electric car industry is in the growth phase, and so is the demand for Tesla’s cars. Let’s see if there are any catalysts in play that will enable the company to post another profitable quarter.

Tesla Motors Inc (NASDAQ:TSLA)

Tesla Motors Inc (NASDAQ:TSLA) was founded in 2003 and is headquartered in Palo Alto, CA. It designs, develops, manufactures and sells electric cars and electric vehicle power-train components. The company sells its cars through 32 Tesla stores in North America, Europe and Asia. The electric-automaker’s stock recently jumped to $100 for the first time.

A significant development

In the first quarter of 2013, Tesla Motors Inc (NASDAQ:TSLA) reported record high revenue of $562 million, up 83% from the last quarter. This increase in revenue was largely driven by the sale of 4,900 Model-S vehicles, which beat the company’s forecast of 4,500 vehicles. Tesla earned 12% of its revenue from the sale of a zero-emission vehicle (ZEV) credits to other automakers, but the company expects a decline in this segment in the future.

One of the interesting items in Tesla’s latest financial disclosures is the significant contribution made by other income. Other income came in at $17 million, compared to $0.8 million in the last quarter of 2012. This is particularly important when the company made only $11 million in net profit and had a loss from operations of $5.5 million during the first quarter.

This huge contribution from other income is due to a reduction in fair value of the Department of Energy (DOE) warranty liability of $10.7 million. The rest is from favorable foreign currency-exchange impacts. Both of these items are considered one-time items and will not appear every year. Adjusting for other income, the company posted a $5.7 million loss at the end of the first quarter.

The company’s gross profit margin improved from 7.7% to 17% over the previous quarter, and the company expects to post a gross margin of 25% in the fourth quarter of 2013. At the same time, it expects an increase in operating and R&D expenses in the current quarter of 2013. Therefore, the target might be considered too ambitious.

By 2014, analysts expect Tesla Motors Inc (NASDAQ:TSLA) to produce a net profit margin of around 5.2%, which I believe can be achieved if the company improves its production. For this purpose, Tesla has set aside $200 million that will be spent on improving the company’s production. Its first-quarter’s net profit margin came in at 2%.

So, I believe even if the $200 million is spent on improving the production facilities, Tesla will require some time to reach the anticipated profit margin figure. On the other hand, other car manufacturing giants like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are operating within the range of 3% to 5% net profit margins.

Future growth

Innovation of the Model S is the main driver for Tesla Motors Inc (NASDAQ:TSLA)’s growth. According to Tesla, the company is receiving more than 20,000 orders per year for its Model S, but it reported a 12.7% reduction in its May sales. Tesla Motors Inc (NASDAQ:TSLA) sold 1,425 cars in May as compared to a monthly average rate of 1,633. Further, high battery costs are a major hindrance to the car’s mass production. The company needs to work rapidly to reduce battery costs if it intends to bring the car to the mass market. Tesla also announced its plan for a lower-priced electric car that will hit the markets in early 2015.

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