Following Model 3, Tesla Has Potential To Achieve Record Gross Margins

Tesla Model 3

MAY 21 2017 BY EVANNEX 20

Tesla Model 3

Tesla Model 3

WALL STREET ANALYST: PORSCHE TOOK A DECADE TO ACCOMPLISH WHAT TESLA WILL DO IN THREE YEARS

After this month’s earlier earnings call from Tesla, analysts have been trying to decipher Elon Musk’s statements in order to predict the company’s future.

According to reports from CNBC and Markets Insider*, Wall Street analyst George Galliers from Evercore ISI forecasts that “Tesla will do in three years what it took Porsche 10 years to do… following the buildout of the Model 3, [as] Tesla has the potential to achieve sustainable gross margins comparable to those of high-end German auto brands, while growing more like a rapidly advancing Chinese automaker.”

Specifically, Galliers wrote, “Tesla is an extreme growth story with unit sales +51% last year and automotive revenues +70%. The introduction of the Model 3 will support similar/ stronger growth this year and next.

Meanwhile, further out, the company expects the growth rate to be maintained, with CEO Musk commenting last year that he expects ‘roughly 50%ish [unit] growth from there [2018]’. To put Tesla’s growth in context, we note it took Porsche 10 years and four product lines to grow from c35k units to >100k. Tesla is on course to achieve similar growth in only 3 years.”

*This article comes to us courtesy of Evannex (which also makes aftermarket Tesla accessories). Authored by Matt Pressman.

Tesla

Tesla 2016 unit sales growth versus competitors (Source: Markets Insider* via Evercore ISI)

So what about Tesla’s margin? “Tesla’s unadjusted gross margin of 25 percent last year is impressive by any standard,” Galliers explained adding that “Tesla has the potential to achieve margins that are double those of US peers today.” Furthermore, it’s reported that gross margins of 25 percent “would place it above BMW and Mercedes and just below Porsche.”

Furthermore, “Galliers acknowledged that Tesla’s ambitious production schedule will be a stretch for the company, [but notes that] it is not unprecedented. For example, Chinese automakers Great Wall, BYD, Jianghuai, and Chery all ramped up production at rates similar to, or not far behind Tesla’s stated goals.”

Galliers concludes, “Tesla’s top-line developments over coming quarters will ultimately be determined by the launch cadence of the Model 3.” He believes that the risks surrounding the Model 3 have diminished and that orders for the Model 3 “are without precedent.” Galliers said that the Model 3 represents the largest preorder event in automotive history with hundreds of thousands preorders in place, and expects it to be a hit.

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*Source: CNBC; Markets Insider

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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20 Comments on "Following Model 3, Tesla Has Potential To Achieve Record Gross Margins"

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Jim Whitehead

I used to post often on seekingalpha, until I got sick of hearing the same 20 whiny complaints repeated endlessly by “Chicken Little” shorts, who predict that Tesla’s sky is falling soon. (This almost happened in early 2013, says author Vance in the excellent bio “Elon Musk” that I read. Vance discovered that Musk was even in talks with Google for a takeover sale of Tesla at about $50 a share. This was called off when the Model S got superb ratings and a big sales boost).

Tesla is a runaway train of a stock, with huge highs and lows. So I and a few other longs have been warning the shorts, they are likely to … lose their shorts soon. It just happened last month. Most of the whiny shorts disappeared, likley cleaned out by margin calls. Some have recently returned and found their complaints. So it seems that Shorts are like cockroaches: If you spray your house to get rid of them, a few months later, a new batch arrives to pester you again. 🙂

Someone out there

Shorting is always dangerous business but at the same time TSLA is an obvious stock to short. A car company that sells less than 80k cars per year with a higher market value than GM? That doesn’t make any sense at all!

AlphaEdge

Share price always represents future value. Not what the company is today.

Lou Grinzo

Bingo. If the T3 takes off the way almost everyone here wants it to (and, frankly, the way we need it to, for a lot of market- and climate-related reasons), then Tesla will definitely be in “lit afterburners” mode.

The T3 has a very good chance of being a “knee in the curve”/”tipping point” product that will launch Tesla from being a largish boutique car maker to a mainstream player.

F150 Brian

Maybe, except for two very real possibilities:
1) M3 being a Mega success is already factored into the stock price, when it may pan out to be “just” a great success
2) Musk gets tired with this project and moves onto the next toy

Either of these could send the stoke much lower despite gross margins, profits, positive cash flow, etc

Pushmi-Pullyu

What you say is entirely logical.

Sadly for all those Tesla shorters who have, as Jim already said, “lost their shorts”, most movements of stock prices are anything but logical.

Since Jim is posting here, I’ll quote perhaps the most memorable thing I ever read on Seeking Alpha:

“Tesla envy happens when other people have, ahem, long positions and yours is too short.” — Jim Whitehead

Someone out there

Of course but what is the future for Tesla? Nobody knows of course but it is extremely unlikely they will be bigger than (current) GM anytime soon. Tesla is so far away at the moment and a lot can happen while they catch up.

It’s unlikely that Tesla will even turn a profit until 2019 but even at that point it will be modest and will be for several years. At the same time every other manufacturers are now about to release competitive EVs on their own. Tesla has had a “free ride” for a while but that is coming to a stop fairly shortly. When Audi, VW, GM, Hyundai, Volvo, BMW, Mercedes-Benz and more are releasing their 300 mile EVs in the 2019-2022 timeframe Tesla will have vastly tougher competition. The big boys have been slow to start but when they do come they come with force.

Mike

Speaking of margins, there was an interesting quote from one of the engineers at SpaceX. He was discussing the cost of rocket engines with Musk and the topic of the cost of the Model Swas used as an example. Musk made the comment that the S costs then 30,000$ to build.

This raises interesting points. 1) the Model 3 should be very profitable even for the base Model. 2). GM and everyone else are way behind. If they lose money at 37500,

George Bower

Mike,
Margin on the Model 3 has got to be less than on the S and the X. So I don’t understand the conclusion that gross margins will increase with model 3 production. Revenue yes, margins I’m not so sure.

Interesting that Musk said the Model S only cost 30k$ to build….good input if true. Do you have a good reference for that quote?

Mike

It was from an interview about 2 weeks ago with the head of rocket engine design. It might have been on InsideEV or maybe electrek

The conversation was largely about manufacturing and understand why costs varied so much between industries.

AlphaEdge
Four Electrics

I suspect that the marginal cost for other automakers is similar. It’s the marginal cost, after all, and other automakers have more streamlined operations.

Pushmi-Pullyu

“Margin on the Model 3 has got to be less than on the S and the X.”

A year or two ago, some Tesla spokesman — probably Elon — said they planned for an approx. 15% profit margin on the Model 3, as opposed to the ~25% margin on the Model S.

But more recently, Elon said he expected the Model 3 profit margin to equal the MS profit margin before long. That makes absolutely no sense to me. The whole idea of selling a more down-market car in large numbers is to more than make up in quantity what you lose in margin.

Maybe I don’t understand what Elon meant by the more recent statment. Maybe he was talking about total gross profits, the dollar amount, and not the percentage profit margin?

mx

If sales grew 50% but revenue grew 71%, then more high end cars are being spec’d and sold. That’s great news.

So, it looks like the “upper middle class” “reaching” up to buy a Tesla has subsided, and replaced by “upper class” people buying full features S & X.

That’s just good news all around.
Upper Middle – waiting for the Model 3.
Upper class – Not waiting.

mx

Just as a cautionary note:
Wall Street News manipulation works 2 ways.
Hype and Depress.
It could be the same short money funding both.

zzzzzzzzzz

No, it works in the way of Pump & Dump. Generate as much hype as possible about fantastic future potential, and then dump shares to schmucks leaving them holding the bag. Pumping should work until everything is dumped, and it doesn’t matter afterwards.

There is classic The Wolf of Wall Street movie about it, although details in reality may different from the movie story.

Longvsshort

The game-changing nature of the Model 3 as I see it, is that since Tesla is not vested in ICE models, they are not afraid to ramp, ramp, ramp the production as much as they can in a way that other automakers haven’t done with their more affordable EV models. Most obvious case is GM with their Bolt. A great car, produced in far to small volumes and at too high a price to not cannibalize the ICE lineup of GM.
I really hope we will in less than a year see in the monthly scorecard, say at least ~10k/mo of the M3 in the US. Unheard of numbers per model per month up until now (for EVs). And that Nissan will follow suit with quickly ramped up Leaf 2 production (a logical next step for an EV model that’s been around the longest and have built up a wide recognition already), and GM likewise after the slow start with the Bolt.

Wineboy!

If TSLA doesn’t sell tons of cars it can still sell powerwalls and large scale batteries to utility companies etc. Bottom line is the Gigaplant is their ace in the hole. Anyone shorting Tesla based on Car facts alone is in for a world of hurt.

SJC

First year production could be well over $40,000 each with more loaded models going to the first reservations.

Nix

It is a sad sign when comments from well known self-admitted Tesla shorters dominate stories about Tesla in a green car car blog.