Tesla Motors Inc (TSLA)’s Plan For the Rest of the Year


Tesla Motors Inc (NASDAQ:TSLA) is rewriting the rule book of the auto industry, but also writing the rule book in the energy storage market. Both of these present opportunities and challenges for the company. At the company’s annual shareholder meeting, Tesla’s celebrity CEO, Elon Musk, updated participants on their various projects.

On the auto side, Musk said that the much-talked about Model X is almost entering the road – just be patient for the next three or four months.

On the energy storage segment, Tesla announced new output limits for the residential version of energy backup battery product Powerwall.

To the investing community, Tesla is moving in the right direction. Both Model X and the energy storage solutions are expected to drive significant revenue gains, bolstering the Tesla brand and pushing stock prices to new highs.

If there was one common theme at Tesla’s shareholder meeting, it was that there are more reasons to stick with the company – and be patient.

Model X launch

Coming to market: Tesla is already in the final stages of bringing its newer nameplate Model X to market. The CEO, Elon Musk, cited that deliveries of the fully electric engine SUV would start within the next three to four months. That means towards the end of the third quarter of 2015.

The management expects the Model X to secure 5-star safety approval in all categories. Model S achieved that safety rating.

Boost from Model X: Tesla Motors Inc (NASDAQ:TSLA) will be able to expand its reach in the electric car segment, which is the fastest growing category of the auto industry today. Positive reception of Model X, as widely expected, will be able to boost confidence in Tesla’s design capability and products in general. The company will be able to raise more awareness about its products, encouraging adoption in the process.

Market for Model X

The market for premium luxury cars is growing in the U.S. and elsewhere, and Model X is poised to tap into that opportunity.

Improving the U.S. economy should see further growth of the premium luxury car market. The premium SUV market expanded at a compound annual growth rate of 6.8% between 2004 and 2014 and 16.3% from 2009 to 2014. More growth is expected as the economy strengthens.

Given that the Model X is coming with enhanced performance and safety capabilities compared to competitors, Tesla will be able to sell more in the expanded premium luxury car market.

It looks like the Model X will be able to appeal to both premium luxury car markets and traditional SUV buyers on the basis of fuel economy. Many SUVs lack fuel economy, but the Model X takes away the fuel question altogether because the car is powered by a rechargeable lithium-ion battery.

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More from Tesla’s auto segment

Model 3

Tesla Motors Inc (NASDAQ:TSLA) could introduce the Model 3 prototype next year. Model 3, likely to be priced at $35,000, is expected to compete with the BMW 3 series and Audi A4, which cost in the range of $32,000 to $53,000.

Model 3 will be Tesla’s play in the electric engines mass market. Unlike what was likely expected, Musk dropped a hint that the car could come with a range of about 250 miles. Many people had feared that Tesla would impose tough range limits on the Model 3, but that isn’t going to be the case. Tesla is looking to drive its competitive edge in the electric car mass market, a longer range Model 3 would be a great move.

Tesla Energy

Tesla Motors Inc (NASDAQ:TSLA) wowed the energy industry with the portfolio of energy storage solutions going by the names of Powerwall (Residential) and Powerpacks (Utility).

What the company did at its annual shareholder meeting is announce improvements to the residential energy storage version to address consumer concerns. Tesla doubled the output limit of Powerwall to 4kWh, from 2kWh. Many people had worried that 2kWh was not adequate for their entire household.

The elevation of the output limit on Powerwall also makes the product more competitive.

Energy storage sector:

Investment in the energy storage sector has cooled, which bodes well for Tesla because the company can widen its lead, given its strong balance sheet. Tesla has more than $1.5 billion of cash in the bank, and is also in a better position to raise debt, given the low interest rate environment. Fundraising through equity is also possible for Tesla.

Investment in energy storage peaked at about $1.495 billion in 2011 and fell to $743 million in 2012. Energy storage investment further declined to $604 million in 2013, only managing to rebound last year to about $1.25 billion.

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Given Tesla’s liquidity and the progress it has already made in battery technology, the company looks poised to lead the sector as rivals face difficulties raising funds. It will require its competitors to prove the viability of their technologies and drive market demand before they can convince investors to pour money into their battery projects.

As rivals struggle, Tesla will be benefiting from both economies of scale and market share lead.

Tesla’s Gigafactory

Tesla’s more than $5 billion battery plant, called the Gigafactory, will bring the company closer to a mass market car – Model 3.The company will benefit from economies of scale and also bolster its production to meet demand. Battery shortage has been a major drag in the company’s production.

Risk areas

Concentrated supply model: Tesla Motors Inc (NASDAQ:TSLA) has not diversified its component suppliers, which means that a disruption of its supply chain could lead to material impact on its production.

Slow uptake of electric cars: Many people appreciate Tesla’s electric engines, but issues of range performance and lower oil prices have slowed down the adoption of fully electric cars.

Battery cost: The ability of Tesla to produce an electric car for the mass market depends mostly on its ability to reduce the cost of producing batteries. The company can do that through scale or technology advancements. However, failing to achieve significant cost advantages in battery production could frustrate the Model X and Model 3, as well as other projects.

Bottom line

Tesla Motors Inc (NASDAQ:TSLA) has figured out how to grow – tapping into industries with rapid growth, namely premium luxury cars and energy storage. In the short-term, Tesla’s progress may be slow, as it challenges the status quo in the auto industry and writes new rules in energy storage, but the long-term is attractive. Buying Tesla ahead of the Model X unveiling could be a great move.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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