Will Tesla last?

[derekt75]

I'm wondering how likely it is that Tesla goes bankrupt and leaves me with a $100k museum piece.

I know it's been discussed before, but most of the conversations center around "Elon is a genius" or "The cars are great" rather than on numbers. I'd like to get my head around the numbers.

Tesla currently loses money with every Model S that they produce.
They say that by 2013, volumes can give them a 25% gross margin.
I'll assume that their gross profit in 2012 will be 0 rather than a negative number.

Tesla is looking to sell 20,000 Model S in 2013. If the average selling price is $75k and they sell 20,000 units, that's $1.5b in revenue and $375m in gross profit for 2013.
Unfortunately, Tesla's operating expenses are $410m per year. I'm not sure if this is going up or down. They're opening more stores, but they have less capital investment to make in their factory.
Regardless, it's hard to see much operating income for Tesla in 2013, and they have some loans that need repayment (e.g., to the government).

After Tesla sells 20,000 Model Ss in 2013, then what? How big is the market really for a $50k+ electric vehicle? A lot of us have been very excited about the car for some time, and we've put in our deposit. but there have been fewer than 15,000 of us. How many more are realistically out there? For a case study, what happened after the long queue of Tesla Roadster reservations had been worked through? I expect the vast majority of Roadster sales happened before the reservation queue had been depleted, and after that, sales probably dropped to nearly a trickle. Is my conjecture correct, or did Roadster sales remain strong in their final year of sales?

If Model S sales drop like I think they might in 2014, then 2014 shapes up to be another bad year for Tesla as the Model X will probably not turn much profit in 2014. Maybe combined Model S and Model X sales combined turn a gross profit of $200m in 2014, but operating expenses will probably still run closer to $400m.

How will Tesla realistically be able to get to the point where they have the operating income to cover their debts?

thanks,
Derek
P6852 (still not finalized)

 

[brianman]

Tesla currently loses money with every Model S that they produce.

Unless you're including R&D, I didn't think this was the case.

 

[derekt75]

Unless you're including R&D, I didn't think this was the case.

According to their SEC filing at the beginning of October:

In the third quarter of 2012, we anticipate that our gross margin will be negatively affected primarily by the limited number of Model S vehicles we intend to deliver, the consequent allocation of all manufacturing and labor overhead costs across a smaller number of vehicles, manufacturing inefficiencies, higher costs for initial parts, and the delay of development services revenue from Daimler, resulting in a negative gross margin in the range of 15% to 18%. Revenue from Daimler will be recognized when we reach final agreement upon the development milestones and related payments which we anticipate finalizing in the fourth quarter of 2012. In the fourth quarter we expect gross margin to improve substantially and turn positive mainly due to higher Model S volume, as well as cost efficiencies and planned cost reductions.

 

[Zextraterrestrial]

Utility of the Roadster vs the S is completely different.(otherwise i may have considered a roadster)
Gen III and the S will be different too

I could see mmmmmany people interested in these cars (If they only new about them)

 

[Robert.Boston]

The gross margin of incremental Model S sales is targeted at +25%. Allocating overhead and other costs to units doesn't tell you anything meaningful about future profitability.

Re the question of whether Tesla can sell more than 25k cars, I think the answer is "yes." Consumers buy over 1million premium sedans (>$50k+) annually, so Tesla's target market share of 2% is very modest in light of the extraordinary reviews. Musk claims that Tesla has positive profits at 8k vehicles annually, which seems very achievable.

 

[ggr]

According to their SEC filing at the beginning of October:

Reread what you quoted, carefully. It says that the company's gross margin is negative, not that the gross margin on the Model S is negative. Selling more of them will contribute to the gross margin becoming positive. Therefore they are making money on Model S's.

 

[Raffy.Roma]

I think that Tesla will be successful if Tesla management will be more concerned about the taste of people. My friends in Italy didn't even consider Model S after having known that power folding mirrors are not available.

 

[mitch672]

There are other hidden factors not accounted for:

Tesla is a drive train manufacturer, there will be income from Toyota for the next 12 quarters (36 months), Toyota plans to mfr 2,500 RAV4 EVs over this time period, that's about 70 motors, battery packs and inverters per month, more if Toyota decides to increase quantities. They make a profit on each of those, the exact amount is unknown.

They have deals with other mfrs as well, to supply their unique drive train components, more income.

They work with other mfrs and provide engineering consulting on their EV programs, we can assume they mark up the engineers time involved in these consulting projects... More income.

As the number of Model S's on the road increases, the car will gain a lot more "visibility", which will create more demand, by being seen and of course via the best advertising: "Word of Mouth"

There are plenty of people buying luxury cars in the $80-100K price range that have never heard of Tesla, there's plenty more potential sales to come. They don't even advertise yet, imagine if they could reduce the delay between ordering and delivery, they could start actually advertising and marketing much more aggressively (generating additional sales)

There is the large untapped. "rest of the world" markets, gasoline is $8+ on many parts of the world, a unique EV with the Model S's range is highly desirable. They could eventually setup other plants in Asia, Europe, Australia, etc. the global EV market is huge.

Tesla's drive train and technology is an evolution of the Tzero from way back, but is much more developed and refined now, even if all of the above never panned out, several large automotive mfrs would be in a bidding war over Teslas IP (Intelectual Property) and patents. There's virtually no chance of getting "stuck" with a $100K paperweight, as you so elegantly stated.

One more thing: no one ever got rich betting AGAINST Elon Musk, he's been very successful at almost everything he's ever been involved with, he's very determined and driven to succeed.

 

[Johan]

There is the large untapped. "rest of the world" markets, gasoline is $8+ on many parts of the world, a unique EV with the Model S's range is highly desirable. They could eventually setup other plants in Asia, Europe, Australia, etc. the global EV market is huge.

This! Especially in combination with the fact that currently it would seem Tesla is at least 1-2 years ahead of all competetion in terms of R&D, manufacturing and real-life roll-out of functioning high-performance, long-range EVs. I think that especially the future of the Asia market is hughely underestimated. Here is part of something I posten in the TSLA investor thread a while back when this was discussed:

Consider China (this is also true for some of the "Tiger Economies" of south-eastern Asia): Population 1.35 billion people. In 2011 there were 83 motor vehicles per 1000 people. This number has been growing rapidly and China has an explosive growth of middle- and upper class. Let's say that for now just 1% of the population are in a position to even consider buying a car, still that's 13.5 million people who are looking to buy their first ever car. Next year it might be 2%, the year after 3% etc. Anyway, many of these are people do not have the "burden" of much experience with ICE cars. They don't have the brand affiliation og traditions of ICE cars. They are more "native". I believe they will be much more likely to buy an EV. Think of it this way: ff you had never seen a car before, never driven one before, knew nothing about combustion engines or eletric cars and you were presented with one of each, isn't it clear you would pick the EV? The modern chinese don't have to go through the same gradual technological switch we're seeing in the west - there aren't thousands of car dealerships, millions of gas stations (especially in more rural areas) etc. They can just make a quantum leap straight in to the future. They are expanding their electric grid very rapidly anyway. It seems the governement there has got it right - they understand that Chinas future growth will require a lof of management of CO2 emissions and other environmental effects, and they get the fact that if "the average chinese" is going to own his own car in just one or two generations, these cannot be ICEs, since that would be such a huge additional burden with reagards to emmisions. Yes, for now, a lot of electricity is generated in a dirty fashion (coal etc.) but given some time I believe China will be doing a gradual switch to sustainable energy.

 

[SCW-Greg]

Final piece to the EV puzzle that Elon has correctly foreseen, is the build out of a supercharging network, that will finally make EVs viable for cross country travel, and mitigate any remaining range anxiety.

When they built the first gasoline cars, this was an epic concern/hurdle to overcome. It was also for the first passenger diesel cars too (though an easier buildout since the network was already in place). Many manf. gave out maps to where there were diesel stations. Not sure how people gave faith to where the first gas stations would be (back in the day - with no "apps" or easy online checking ahead), but probably something that very gradually eased over time as they grew their treks further and further away from home.

 

[Oyvind.H]

If Tesla can reduce their 1 year waitinglist I am certain that they would sell at least 3-4.000 cars per year in Norway alone. Until now only people with determination and special interrests have reserved the Model S in Norway (about 5-600 people?), but when the cars start arriving sales will definitively increase. Almost noone has seen or heard about Tesla, but still over 500 people have reserved the car. Because of norwegian ICE car taxes the Model S outperforms the following cars in Norway:
- Ford Mondeo
- VW Passat
- Audi A6
- Audi A5 sportback
- Toyota Avensis
- Jaguars, Lexuses
++++
The list is long, and if Tesla can manage to ramp up properly and spend a dime or two on marketing they`d easily sell 5-6.000 cars per year. Demand for the Model S? Definitively not a problem.

 

[sublimaze1]

I think the answer lies within the concept of integration. Not necessarily integration into the automotive world, but rather into the supply and demand chain. Already, we are seeing Tesla indirectly demanding production of Lithium based battery cells, thus keeping lithium mining going. We see Toyota and MBenz demanding drivetrain or battery parts from them. We see the trucking industry delivering the vehicle, thus keeping auto transport employed (okay, the last one there is weak, but you get my point). Unlike other companies that have a "niche" product, but have not integrated themselves into the capitalism process, Tesla is working its way into such a position.

Now, it is certainly possible for it to flop - many others have. But as Oyvind states, just a few precision placements of marketing in Europe, and a better production volume (thus decreasing wait times), and Tesla will be (and, IMHO - is) the "Apple" of the automotive world. Irrespective of its lack of mirroring Apple in the stock market, Tesla still is continuing to move forward and does not and will not stop development.

I am voting that they will last.

(at least til my warranty expires) :scared:

 

[lgagliardi]

Tesla is a great bet right now. They have disruptive technology that is already developed and that they are currently selling. They have another vehicle (X) already planned. They can start making trucks - which is a huge market but when they come out with their $30,000.00 electric car, watch out. I can see them producing 500,000 cars a year. Do the math on that one. Risks? Nothing is a sure bet but this man is a genuis who happens to be very,very, skilled on how to run a business. The proof? He has done it before (paypal), and he is successful doing it now (spacex). To be able to have one of the first 1000 (SIG) model s I feel is a great privelage.

My recommendation, BUY THE CAR AND BUY THE STOCK!!

 

[derekt75]

Reread what you quoted, carefully. It says that the company's gross margin is negative, not that the gross margin on the Model S is negative. Selling more of them will contribute to the gross margin becoming positive. Therefore they are making money on Model S's.

Yes, the company's gross margin is negative. but how could that happen with a positive margin on the Model S? Are you suggesting that they're selling enough other products at a negative margin to bring the whole company to a negative 18% margin? The only product they could sanely sell at a -18% margin right now is the Model S. Everything else they sell should be at least close to zero if not positive, I would think.

Selling more Model Ss will make the cost of goods on the S lower as labor costs will be driven way down and material costs will be driven slightly downwards.

Incidentally, I mistakenly said that the SEC filing was the beginning of October, when it was really the end of September.

- - - Updated - - -

There are other hidden factors not accounted for:

Tesla is a drive train manufacturer, there will be income from Toyota for the next 12 quarters (36 months), Toyota plans to mfr 2,500 RAV4 EVs over this time period, that's about 70 motors, battery packs and inverters per month, more if Toyota decides to increase quantities. They make a profit on each of those, the exact amount is unknown.

They have deals with other mfrs as well, to supply their unique drive train components, more income.

They work with other mfrs and provide engineering consulting on their EV programs, we can assume they mark up the engineers time involved in these consulting projects... More income.

As the number of Model S's on the road increases, the car will gain a lot more "visibility", which will create more demand, by being seen and of course via the best advertising: "Word of Mouth"

There are plenty of people buying luxury cars in the $80-100K price range that have never heard of Tesla, there's plenty more potential sales to come. They don't even advertise yet, imagine if they could reduce the delay between ordering and delivery, they could start actually advertising and marketing much more aggressively (generating additional sales)

There is the large untapped. "rest of the world" markets, gasoline is $8+ on many parts of the world, a unique EV with the Model S's range is highly desirable. They could eventually setup other plants in Asia, Europe, Australia, etc. the global EV market is huge.

Tesla's drive train and technology is an evolution of the Tzero from way back, but is much more developed and refined now, even if all of the above never panned out, several large automotive mfrs would be in a bidding war over Teslas IP (Intelectual Property) and patents. There's virtually no chance of getting "stuck" with a $100K paperweight, as you so elegantly stated.

One more thing: no one ever got rich betting AGAINST Elon Musk, he's been very successful at almost everything he's ever been involved with, he's very determined and driven to succeed.

Well as stated in my initial post, the Elon Musk argument isn't especially compelling to me. I suspect that most extremely successful businessman have had at least one spectacular flop in their career. I'm not saying I'd bet against any one Musk company nor against Musk himself; I'm just saying that if Musk keeps on attempting game-changing companies, one of them will flop. and Warren Buffet will make a bad stock decision.


The other points are fair, though. The international market could be much bigger than I had considered, and it might take a little longer for the international market to get off the ground.

Domestically, I still expect Model S revenue per month to slow after they work through these initial reservations. I think most people likely to buy a Model S have heard of it by now. perhaps they should thank Romney for the free "advertising"?

Actually, that would have been a great official response from Tesla:
"We're repaying the government loan on schedule with 5% interest, and we thank Governor Romney for making millions of Americans aware of us. We feel that we manufacture the best cars on the planet, and our biggest challenge has been to get a chance to show people. Once people consider our cars we have an extremely high rate of reservations, and we're looking forward to being considered by many who just heard of us recently."

...
I do feel better that Tesla's battery technology is in use by many "mainstream" car companies.

 

[strider]

Yes, the company's gross margin is negative. but how could that happen with a positive margin on the Model S? Are you suggesting that they're selling enough other products at a negative margin to bring the whole company to a negative 18% margin? The only product they could sanely sell at a -18% margin right now is the Model S. Everything else they sell should be at least close to zero if not positive, I would think.

No, the company's margin includes all of those service center build-outs, employee hiring, R&D, factory investment, loan repayment, etc. At current volumes more money is going out than is coming in. As volumes increase that will reverse (we hope).

 

[rcc]

Why does early Model S production have a negative margin? It's because Tesla tooled up the plant and hired personnel to produce ~400 Model S's a week.

If you're only producing 25 cars a week, you're carrying lots of cost for people and tools and not getting the return on investment because you're not getting the production volume.

Production has to rise above a certain rate for that cost to pay off. Elon said in the June investors concall that the number is 8000 per year for Tesla to be cash flow positive. Divide by 50 and that says they need to be able to build and sell 160 cars a week for the company to go cash-flow positive.

That number is actually higher than the number required for the Model S margins to be > 0%. According to Elon, the 160 per week will generate enough profit to cover all of Tesla's costs: stores, service centers, admin, planned R&D, etc.

 

[derekt75]

No, the company's margin includes all of those service center build-outs, employee hiring, R&D, factory investment, loan repayment, etc. At current volumes more money is going out than is coming in. As volumes increase that will reverse (we hope).

No, that's not the definition of gross margin.
Gross margin is revenue minus cost of goods sold. What you listed are operating expenses, not costs of goods sold.
A negative gross margin means that even if you got rid of service centers, hiring, R&D, factory investment, loan repayment, etc., you'd still be losing money.

As I noted in that post #14, higher production rates will still lower COGS, because material prices come down with volume and labor and manufacturing facilities are used more efficiently with higher volume. I never took issue with the idea that Tesla could get to their stated margin target of 25%.

but in September, I think the SEC filing clearly shows that the cost to produce a Model S was higher than the sale price of that vehicle.


[update: loan repayment isn't COGS nor operating expense].

 

[ckessel]

No, that's not the definition of gross margin.

Is labor to produce the car part of the calculation? The initial cars will have a very high labor cost since they're spending a lot of time on each one.

 

[derekt75]

Is labor to produce the car part of the calculation? The initial cars will have a very high labor cost since they're spending a lot of time on each one.

yes, it is part of the definition, and surely a large part of the reason why the margin was negative in September and expected to be positive in 2013.

Still, they need to generate $400m in margin to offset their $400m in operating expenses before they can generate cash flow to pay off loans. It strikes me that this will be a challenge in 2013 and perhaps more of a challenge in 2014.

 

[SteveG3]

derekt75, as you saw the international potential is a big piece of where they could break out beyond initial enthusiasts.

as was already stated much of the world pays about $8/gallon. this is the case give or take some throughout the EU. in the EU people also drive shorter distances, (smaller countries, and more train travel). my sense is that mainstream EU sensibility re the environment is more what one would consider leftish here in the U.S. I'll also be politcaly incorrect enough to say that in general EU is more open to adopting a new standard (i.e. generally we here in U.S. a bit more skeptical that such change is an affront to our freedom).

so I think E.U. a great opportunity. Norwegian poster's comments consistant with this.

as far as U.S., I read what those who've gotten their S's say here on TMC. of course, I don't know how much is colored by being Tesla fans, but I think mostly the rave reviews are because the car is a stand out. Automobile article today backs this up as does a slew of reviews over the past few months, that include hard data re performance and superlatives about personal experience. Ultimately, if the car kicks butt, all but the most tied to the oil industry will dismiss any political skepticism and sign on for the best new ride out there.

so, if they ride increased S/X sales to viability long enough for Gen3, watch out!

by the way I appreciate the question. this may be a website for enthusiasts, but we won't help ourselves wearing blinders.