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Don’t Sell Tesla – Here’s Why

After thoroughly shaking the American automobile industry this year, the electric car maker Tesla Motors (TSLA) is now out to establish itself in the world’s largest automobile market, China. Meanwhile, the company is eying uptake in production from its California factory as it aims to capitalize on the excess demand. Its recent Q3 report disappointed investors, despite the better than expected performance in terms of revenues and income.

However, its entry in China, its updated production plans, and the expected launch of the Model-E, the mass market vehicle in just 13 months, have shown that the business will continue growing its top and bottom line in the coming quarters. The company is laying foundations for significant growth in domestic and international markets.

Although its shares are not for the faint hearted, there is no reason to sell Tesla as there is a lot to look forward to in the coming years.

Now Available In China

Last month, the company opened the doors of its first showroom in China where locals, for the first time, laid their hands on its iconic vehicle; the Model S. With the showroom up and running, the company has also launched its Chinese website, Tousule.cn. Currently site is taking pre orders for Model S and Model X against reservation charges of RMB 250,000 ($41,000). The delivery of Model S is expected within the first three months of 2014 while the Model X will come following its launch in the United States.

While a Tesla vehicle is already an expensive purchase for an average American consumer, it is going to be considerably more expensive for Chinese consumers due to the hefty import duties. Tesla’s Model S will be priced between $146,000 and $200,000 in China, which is significantly more than its price in the U.S. of between $71,000 and $120,000.

This, however, does not mean that Tesla has little to look forward to in China. On the contrary, the company could earn significant revenues on the back of the country’s booming luxury vehicles market. Moreover, Tesla is also offering other incentives to lure Chinese consumers towards its vehicles.

Uptake In Production

Meanwhile, in the U.S., Tesla Motors is planning to ramp up its production following the healthy tax break from the state of California. The company could save around $34.7 million in taxes on the purchase of $415 million production equipment.

With the new production equipment, Tesla can more than double its capacity to over 56,500 units per year. Tesla has been targeting to produce more 21,500 units of Model S but with the addition of the new equipment, its production will increase by 35,000 sedans, showing a massive increase of 163% to 56,500 vehicles.

Furthermore, the tax benefit will also help Tesla to improve its production of Model X crossover vehicle, as well as the low price electric sedan which is currently in its pipeline. The business will also increase the production of electric powertrains which it sells to other automakers such as Toyota (TM) and Daimler (DDAIF)

Recent Quarterly Earnings

In its previous quarterly results, Tesla reported a net loss of $38.5 million or $0.32 per share, showing improvements from the loss of $110.8 million, or $1.05 per share, in the same period last year. The company swung to adjusted profit of $0.12 per share, from a loss of $0.92 per share last year, while adjusted revenues rose to $603 million from just $50 million in the corresponding period. The business easily managed to beat both top and bottom line estimates.

In terms of deliveries, however, the company disappointed the market as both, third quarter deliveries and fourth quarter guidance came in below Wall Street’s expectations. Tesla touched a third-quarter record of nearly 5,500 deliveries of Model S vehicles, including over 1,000 deliveries in Europe. The business is expecting slightly less than 6,000 deliveries in the fourth quarter, which would take its total annual tally to 21,500 vehicles sold in 2013.

Competition and The Model E

As Tesla expands its wings in the domestic and international markets and prepares to lauch its highly anticipated Model X next year, other automakers are also gearing to launch their electronic and hybrid vehicles as competition heats up in this market. Tesla will face increasing competition from the world’s leading luxury car maker Bayerische Motoren Werke AG (BAMXY), popularly known as BMW. The company has recently displayed its i8, the premium hybrid sports car, at the L.A. car show. The vehicle will be launched in 2014 and will come with a price tag of $135,000.Next year BMW, will launch its second electric model, the i3, which will have a base price of $40,000 in the U.S. and would compete against Tesla’s Model E, which will be priced below $40,000.

The Model E is going to be Tesla’s mass market vehicle and, according to a recent interview by Tesla’s chief designer Franz von Holzhausen, could be unveiled at the Detroit Auto Show in 2015, about 13 months from now. This vehicle could be the game changer for Tesla and could propel its growth, as it would be priced considerably lower than the Model S.

Other big boys of the auto industry, such as Volkswagen (VLKAY) and General Motors (GM), are also bringing new vehicles aimed at Tesla’s affluent and eco-conscious buyers.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. This article expresses opinions of the author(s) and does not constitute investment advice. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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