Tesla: A Good Option to Invest

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Not so long ago, people only had landline phones that you couldn’t take anywhere, which now looks very inconvenient to modern people. Then, mobile phones appeared, and while you can take them anywhere, you must not forget to charge them regularly. However, charging your mobile has already become as usual as, for example, brushing your teeth.

When it comes to automobiles, modern fuel cars are like landline phones, as you can’t go anywhere without fueling them at a gas station, spending your time and money and planning your day depending on how much fuel you’ve got in your car tank. Electric cars are certainly cars of the future, and charging them would be something modern people are already much used to, as natural as fueling them now. It’s not the question of how much crude oil we still have on Earth; the point is that the progress is moving forward, and combustion engines, which are complex and expensive to maintain, will sooner or later become obsolete. Electric cars, where you don’t have to constantly watch how much engine oil or coolant remains inside, are about to replace the traditional fuel cars.

Tesla, a company founded in 2003, is by far the leader in electric cars production. One of its founders is the famous Elon Musk, an engineer and inventor.

Tesla presented its first electric car concept called Tesla Model S on March 26, 2009, in Hawthorne, CA. On June 22, 2012, after all R&D was completed, it was launched in the market and cost $112,000.

A few months later, the second prototype came in: this time, it was a crossover, Tesla Model X. According to Musk, Model X serial production would start in 2013, and the car would be available in late 2014. These plans proved to be too optimistic, though.

The supply start date was only announced in February 2014, but then postponed to Q2 and Q3 2015, and it fact the first supply was completed In September 2015. By the end of Q3, only 6 Model X cars were sold, each for $80,000.

In 2016, a new car, Tesla Model 3, was announced, and the sales were scheduled for the same year, but then the start date was postponed to 2017. The first Model 3 was actually sold in June 2017, at $35,000.

Since the first model sales start and up to now, the company has been unable to reach any net profit, with all earnings reports showing losses. The company was on the verge of bankruptcy as long ago as in 2008, and only a NASA contract saved it.

Perhaps the famous April 1 joke posted then by Musk was based on this very event.

However, it’s all quite different now.

Looking at the financial indicators of the company over the last 4 years, one can easily see where those losses come from. In 2014, Tesla invested $464M on R&D, while in 2015 they invested $717M, in 2016, $834M, and, finally, in 2017, the R&D cost Tesla $1.378B.

The losses were growing in proportion, but were cut in 2016 thanks to Model X sales. In 2018, the same may occur, as Model 3 is going to be quite popular, so the company may even start receiving profits.

Before 2015, the revenue came from a single model, which was Model S. In 2015, 50,446 cars were sold, with the total gross income of $5.649B.

In 2016, they started to sell Model X, which boosted the total year revenue to $7.728B.

If the company did not invest so much into R&D, perhaps, Tesla Inc. reports would now look far better than they are, but this would not last long, as the competition is also doing something.

When Model S sales started, it cost $112,000, while the average US citizen monthly income was $4,121. While not everyone could afford such a car, the sales went on rising, as Model S targeted mostly the luxury segment.

The next model cost $30,000 less, but was still inaccessible for an average consumer. This is why Tesla decided to release Model 3 at $35,000, much cheaper than the previous models. However, a bad surprise was expecting the company afterwards.

When Model 3 was presented, people could start applying for it with a deposit of just $1,000. By the end of the day, there were already 180,000 applications; three days later, the number already reached 272,000, and by May 2016, it went on rising to reach 373,000.

However, this only led to more expenses, as the company had to upgrade its production infrastructure in order to meet all those applications (the number of those exceeded the total number of cars sold since start).

When Tesla allowed its customers to apply for the new model, its production capacity was just 120 cars per week, while in order to meet all the needs Tesla had to boost it by 60 times, to 7,200 per week. Elon Musk is a go-getter, but this was crazy even for him.

Both investors and customers are already used to Musk not fulfilling his promises on time; this already happened with both Model S and Model X, where the supply date was postponed multiple times. It has not changed much now. By the end of Q1, Musk promised to reach 2,500 cars per week, but in fact was only able to boost it to 1,987. After breaking this promise, Musk said he was going to get 5,000 Model 3 cars per week by the end of Q2, and, curiously enough, this target was reached, according to the report as of July 2.

This news made the stock price go up, but right at the end of the trading session it was again down by 2.3%, as many investors just did not believe the report was true.

With the past experience of Musk’s promises being quite negative, Bloomberg developed an online tool where everyone can track the Model 3 production process by VIN. The news agency sends a request to the National Highway Traffic Safety Administration (NHTSA) website which sends a response on the number of VIN’s registered for Model 3.

However, car manufacturers usually register VIN’s for the whole batch, so the values Bloomberg gets may be a bit higher than they in fact are. Still, according to these stats, the company reached 4,395 cars per week by July 2.

So, in fact, Musk did not fulfill his promise again, and the market reaction was of course negative. However, the key point here is not fulfilling promises but the overall progress that was made over such a short period of time. Just 6 months ago, Tesla produced around 200 Model 3 cars per week, while now this figure is over 4,000. Tesla market cap is already higher than the one of Ford Motor Company and nearly in line with that of General Motors, while those too have over 100 years of experience in car production and sales.

If Tesla is able to maintain the same progress as before, it will produce over 52,000 Model 3 cars by late Q3, which will lead to good Q3 and Q4 reports, while all negative effects of the trade war against China will be void.

Besides, if we also take Model S and Model X sales into account, chances for good reports get even higher.

Reaching 5,000 cars per week is a very difficult task: Tesla even had to place its new assembly line in a tent.

This GA4 (general assembly) allowed the company to boost the production by 20%, and it actually proved to be one of the key decisions.

Meanwhile, Musk says GA3 will be well enough to maintain the production capacity at 5,000 cars per week, while GA4 will help to reach the further target of 6,000 cars. With Tesla products being in demand, investors can be quite optimistic regarding the future of the company and invest more, although they do have some risks.

Tesla is now a leading electric cars producer with relatively accessible prices, but the competition are also looking towards electric car production, which may of course shrink the demand. Other risks include emergencies coming from the autopilot mode Tesla is quite fond of. There is no law regulating the driver responsibility in such cases yet, so the company has to face claims against itself, which lead to Tesla recommending using autopilot only as an additional feature that does not allow the driver to stop watching the road.

Doug Field, a talented engineer, leaving the company after working with it for 5 years is also an important negative factor. Elon Musk says this should not have any influence on the indicators coming in the following quarters, or on the new Tesla cars production.

Technically, there is a clear ascending trend on W1, with the price using the 200-day SMA as a support and constantly bouncing off it. The price has also managed to stay above $300, which may help it go further up, too.

There is no MACD divergence that could stop this growth for now.

Just like before, Tesla looks like a very good option for an investment. Elon Musk may set too ambitious goals, but he achieves them sooner or later. The demand for Model 3 still exceeds the production capacities, with over 400,000 cars pre-ordered, but this will also allow the company to develop new models. As such, the 40-ton truck, Tesla Semi, was already announced to the public in November 2017, and its serial production is scheduled for 2019.

According to some sources, there have already been 1,000 pre-orders, with the deposit increased from $5,000 to $20,000.

Thus, Tesla may become the first company to produce an electric truck in 2019.

 

Disclaimer

Any forecasts contained herein are based on the authors’ particular opinion. This analysis may not be treated as trading advice. RoboMarkets shall not be held liable for trading results based on recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.