On May 7 after the closing bell, Tesla Motors (NASDAQ:TSLA) released its earnings report for the first quarter of 2014, and by and large, it exceeded expectations — but not to the satisfaction of its investors, who gave the stock a sound thrashing the next day, closing down 11.3 percent, or $22.76 per share.
By all measures, Tesla is making headway. The controversial sales of zero-emissions credits, which carried the company into the black in the past, have been removed from the equation, and despite the company’s loss of $50 million on a GAAP basis, that’s considerably better than some of the reports we’ve seen in the past. Tesla is clearly gaining traction, and more impressively, it’s doing so with one model on the market.
Despite the headway, Tesla now faces its biggest challenge yet: taking everything that it has developed through its startup phase and ensuring it is able to remain in business. Tesla arguably hasn’t faced its greatest challenge yet, and the next couple of years will probably consist of a whole lot of trial and error for the company. But if any company has shown the world that it’s capable of such achievements, it’s the little electric car maker based in Fremont, California.
Here are just a few big things on Tesla’s calendar that it will be grappling with in the next several years.
5. The gigafactory
This one factor alone has the potential to turn Tesla from a niche automotive player into a mainstream automaker and force in the energy field, as well, for an estimated cost of $5 billion. It’s the largest undertaking that the company has set out on since releasing the Model S, and if it works out, the payoff could be huge: an estimated 30 percent cut in costs of the battery packs for its cars, currently the most expensive single component in the vehicle.
The gigafactory would turn Tesla from the largest consumer of lithium-ion cells in the world to the largest producer. Not only that, but the gigafactory is a crucial cog in Tesla’s plans to release its Gen-III vehicle, which is anticipated to cost around $35,000-$40,000 and sport a range of 200 miles. However, that can’t happen until the factory is complete.
4. Expanding margins
For the most recent quarter, Tesla recorded an automotive gross margin of about 25.4 percent. For a newer company that’s impressive, especially considering the amount of investment Tesla’s product has required. However, the company is hoping to see 28 percent margins by the fourth quarter, but even this figure pales compared to where CEO Elon Musk eventually wants it to be: along the lines of Porsche, renowned for its ability to command high prices and generate margins in the neighborhood of 50 percent while doing so.
Tesla’s ability to reach that point will hinge on its ability to lower the cost of its battery packs. Whether the gigafactory will be able to deliver to the degree to make that happen remains to be seen, but historically, it’s been unwise to believe that Tesla won’t be able to achieve something the company has its mind on.
3. Production capacity
This kind of goes hand-in-hand with the gigafactory. Tesla has shown that the demand for its cars is there — each quarter, the company is cranking out vehicles as fast as it can, and these vehicles will never see the floor of a showroom because they’ve already been ordered by a customer. However, Tesla can only build its cars as fast as Panasonic can produce the battery cells necessary for their operation. Work out that supply kink, and Tesla’s production can blow wide open: enter the gigafactory.
Tesla is already moving ahead with a new space in California, though it’s unclear what that space will be used for at the moment. But with the Model X on its way in a year or so (or less), Tesla will need the room to stretch its production legs to ensure its pipeline remains full.
2. The competition
While Tesla has been working to perfect the Model S (and it’s undeniably done a phenomenal job in that aspect), it’s no longer the only luxury player looking to cash in on the electric car game. German outfit BMW will soon be releasing its first all-electric vehicle, the i3, which has already been welcomed in Europe quite warmly. Yes, it’s not nearly as spacious and only gets half the range of the base Model S, but it also costs half as much; the i3 isn’t so much a threat to Tesla’s Model S sedan as it is to the future Gen-III model, which is expected to compete in the same price arena.
Additionally, Nissan (NSANY.PK) will soon be transferring its Leaf EV platform to the Infiniti luxury brand, also in the form of a sedan, giving Tesla another competitor to be concerned with on the other side of the world. Currently, competition isn’t much of an issue for the California-based company, but in about three years, when the Gen-III hits the market, the EV landscape will likely look exceptionally different.
This, naturally, will come in time. Given the innovative nature of its product, Tesla will be sinking plenty of cash into various projects over the next several years, including the gigafactory and the supercharger networks on at least three different continents. Further, with the kind of expansion that the company is aiming for over the next five to six years, Tesla will be investing in more space to increase capacity (it recently closed a lease on a former Chrysler location in California) to reach those milestones.
Over time, though, these figures will deflate and fall more in proportion with its revenue. This year alone, Tesla is looking to spend $650 million-$850 million on capital expenditures for various assets, not the least of which is the $5 billion gigafactory project that it’s hoping to break ground on later this year.