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Tesla Motors Inc (TSLA): Let’s Talk About The Model X

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Tesla Motors IncTesla Motors Inc (NASDAQ:TSLA) surprised everyone on Wednesday when it released its first quarter results. While it had already announced it would report a profit, nobody expected $0.12 per share – three times consensus estimates. As a result, shares were up big after hours, and throughout trading on Thursday.

As share prices rocketed up faster than a Model S goes from 0 to 60, investors, like me, who missed out were left in the dust. All hope is not lost for us however. There could be some speed bumps ahead that present good buying opportunities. Meanwhile, the long-term outlook for the company looks brighter than ever.

Margin

Gross margin improved 9% sequentially last quarter to 17%. Tesla Motors Inc (NASDAQ:TSLA)’s goal is to reach 25% gross margin by the end of the year. This will be closely scrutinized going forward as the company has already made many improvements in terms of efficiency, and faces several challenges going forward.

It took the company 40% less time to build a Model S in March compared to December. As manufacturing efficiency ramps up, the savings will drop off after the company can avoid paying workers overtime.

It will also improve margins through reducing costs from third-party suppliers. Many suppliers were timid regarding Tesla Motors Inc (NASDAQ:TSLA)’s ability to move cars, but after selling 4900 Model S’s and increasing its forecast by 1,000 more vehicles, scale ought to help reduce contract prices.

But a change in product mix will hinder margins in the short term. The company expects to sell more of its newer low-end 60 kWh battery pack cars going forward.

Additionally, a decrease in the amount of Zero Emission Vehicle credits the company receives as a percentage of revenue will impact margin numbers as well. As a result, the company expects this quarter’s gross margin to come in at a similar high-teens figure.

Nonetheless, last quarter’s 17% gross margin compares favorably with other car manufacturers. Toyota Motor Corporation (ADR) (NYSE:TM) grossed 11.8% of revenue in 2012. General Motors Company (NYSE:GM) had a gross margin of just 10.6% in its most recent quarter.

Even luxury automakers, with which Tesla Motors Inc (NASDAQ:TSLA) competes more directly, have only slightly better margins. BMW’s automotive segment reported gross margin of 18.1% last quarter and 20.2% in 2012. Audi reported gross margin of 19.9% in 2012.

Improving gross margin to 25% would put Tesla Motors Inc (NASDAQ:TSLA) well ahead of the competition. It also means that last quarter’s profits are pretty small compared to what’s to come.

Zero-emission vehicle credits

Zero-emission vehicle credits brought in $68 million of the company’s $562 million in revenue through government subsidies. No other auto manufacturer enjoys nearly the same advantage, and it’s likely Tesla Motors Inc (NASDAQ:TSLA) wouldn’t have made it this far without such subsidies.

Going forward, however, the company will likely see this number shrink as a percentage of revenue. Credits apply to about one-half of U.S. vehicle shipments, but as the company expands globally, it expects that number to fall to one-sixth of total shipments.

Despite the fact that Tesla Motors Inc (NASDAQ:TSLA) will continue receiving these ZEV credits for some time, the company does not factor the income into its gross margin expectations. In fact, it’s taking a very pessimistic view regarding these credits, and doesn’t expect them to be material to its business going forward.

Still, analysts project the company could receive close to another $100 million over the rest of the year – all going straight to the company’s bottom line.

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