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Will Tesla Motors Survive In The Prevailing Challenges?

July 01, 2014 | About:
Suravi Thacker

Suravi Thacker

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New car sales in the U.S. surged to 1.6 million in May as demand for cars increased because of economic recovery in the region. In fact, the auto industry reported an annual sales rate of 16.77 million vehicles in May. It is higher than the estimate of 16.1 million units expected by Reuters. Also, this is the highest level since the recession hit the country in 2008. However, rising consumer confidence seems to be influencing new car demand, resulting in delight for automakers.

Further, the average transaction price also increased to $32,307 in the month of May as new car prices jumped $653 over last year. Also, this is not the first time that the car sales have increased. It increased by 8% in the previous month, bringing the annual rate to 16.04 million.

Therefore, it is obvious that automakers are having a good time as they witness sales gains. In fact, one of the growing car retailers is Tesla Motors (TSLA) which posted a great first quarter recently, wherein its numbers were ahead of analysts’ expectations. Let us check.

By the numbers

Revenue surged 10% to $620.5 million as compared to last year’s quarter. Tesla is one of the leading providers of luxury cars and therefore continues to experience great demand for its products. In fact, it also produced more of its Model S, which has become very popular among customers. A total of 7,535 cars was produced during the first quarter of 2014.

However, the company reported a loss of $49.8 million as higher research & development costs weighed on its bottom line. Tesla incurred higher R&D costs because of its launch of a new range of sports utility vehicles. Further, the company is working to reduce its costs and increase its gross margin by the end of the year. The company plans to expand its margin to 28% in the fourth quarter from its current margin of 25.4%.

Moreover, the company is planning to expand in international markets in the coming months, with a focus on China, since it is the largest market for luxury cars. This expansionary move should help in driving sales higher for the car maker.

Hurdles to overcome

However, one of the potential problems to be faced in China is that it does not have proper infrastructure for superchargers. Superchargers are free charging station for Tesla cars only.

Furthermore, it faces challenges in the North American market also. This is mainly because of its business model which sells directly to consumers. Since it does not require dealers in its network, the business model is not allowed in certain states of America. However, the company sells its cars in such states through its website.

Takeaway

Tesla Motors is enjoying the benefits of higher consumer spending as well as an increase in demand of automobiles. This has resulted in a blockbuster quarter and an appreciation of 52.5% in its stock price, since the beginning of the year. Further, its charging stations have also been an attractive point for customers. However, the company might face some challenges in its pursuit to expand in China. But every reward comes at a price. Hence, Tesla needs to take the risk in order to succeed. With the growing market for automobiles in general and electric cars in particular, this car maker looks good to go.


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