He may be right, but the future of Tesla still looks bright in my opinion. Tesla’s constraint to further growth is not sales demand, but its automotive production and its battery suppliers’ capacity.
The company’s car production capacity is increasing, especially with the recent upgrades to Tesla’s current production lines. The upgrade will allow it to handle the Model S and the introduction of their new Model X SUV next year.
In addition, the company has added a new assembly line for the Model X. The automaker is only utilizing 50% of the space of the former NUMMI plant in California that it purchased in 2010. Tesla initially started by utilizing 10% of the space.
Supercharger station buildout
Battery capacity is a different story and is the driver for Tesla’s investment of around $5 billion over the next three to five years in a new battery manufacturing complex in partnership with Panasonic. Battery production is anticipated to be enough for 500,000 vehicles by 2020, substantially more than were produced worldwide in 2013.
Tesla is also building out its Supercharger stations in the U.S. and is installing the network in Germany, Holland, Switzerland, Belgium, Austria, Denmark, England, Wales and Sweden by the end of this year. These stations enable the charging of EVs at 5 times the rate of current systems. They are also powered by solar cells that provide a green based energy source for the vehicles.
As Tesla continues to build scale, the costs associated with the production of its vehicles will continue to decline. Even though earnings per share continue to be negative, the earnings growth is moving in a positive direction.
Three-year EPS growth through 2013 was 69.9% per year, according to the company’s investor relations site. Average trailing twelve month (TTM) EPS growth from 2013 through the second quarter of 2014 was 47.3%. Pre-tax profit margin is also improving substantially over time and I expect it to become positive with the impact of economy of scale.
In my opinion, based on current growth rates of EPS and pre-tax profit margin, I expect Tesla to possibly become profitable in the 2015 or 2016 timeframe.
Shares outstanding are also continuing to increase as Tesla funds their expansion through a combination of selling additional shares to investors and financing by issuing debt instruments. By evaluating sales, EPS, and pre-tax profit margin as well as anticipating outstanding shares to continue to increase at a similar level, my expected five-year compounded annual EPS growth rate is 86% based on my calculations.
The 52-week low for TSLA as of 9/5/2013 was $116.10 and I anticipate that this will be the low price over the next five years. Projecting a high price over the next five years is difficult without a positive earnings history. However, in my view Tesla is at the beginning of its growth phase, which is a good place to be given its current level of success and the demand/supply situation.
DISCLAIMER: The investments discussed are held in client accounts as of August 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
- Sigma Advantage Investments, LLC, is an investment advisory firm founded by Robert Sloma. Sigma Advantage Investments is an independent, fee-only investment management firm offering investment advisory services to individuals; pension and profit sharing plans; trusts, estates, or charitable organizations; and corporations or business entities other than those listed.