What started out as a very bad week for Tesla Motors (TSLA) CEO Elon Musk is going to end on a high note headed into the holiday weekend. It’s not going to a shabby finish for owners of Tesla stock either.
The sour beginning had nothing to do with his electric vehicle company. Rather, a rocket that Musk-led SpaceX attempted to launch on Sunday blew up shortly after takeoff, serving as a setback for the entire privatized space program.
Musk is having far better luck on the ground, however, if last quarter’s Tesla sales figures are any indication. The company sold a record-breaking number of its sleek electric cars between April and June, prompting TSLA to higher levels on the last trading day of the week.
Tesla Sales Soar
As it turns out, it really may have been a lack of capacity rather than a lack of demand holding sales of Tesla vehicles back. After beefing up its output capabilities over the past year, the company managed to deliver a record-breaking 11,507 electric vehicles in the second quarter of the year. That was 52% higher than the number of vehicles the company delivered in Q2 of 2014, and handily topped the 10,045 deliveries made in the first quarter of this year.
The price of Tesla stock jumped nearly 4% on the news to near $279 per share.
And why not? That total surpassed the company’s forecast for deliveries of between 10,000 and 11,000 electric cars in Q2, and now the full-year goal of 55,000 units doesn’t seem out of line at all. Indeed, given that Musk plans to debut the new all-electric crossover vehicle (the Model X) in the very near future and orders for the vehicle already number in the thousands, it would be surprising if Tesla sales didn’t reach that lofty goal of 55,000 automobiles this year.
How Does TSLA Pull It Off?
A great deal of credit for the advent of the electric vehicle is given to the sky-high oil prices seen — and sustained — between 2007 and early 2014. That problem was dramatically solved beginning in July of this year, though, with a 50% plunge in the price of crude. Though oil prices have rebounded somewhat in the meantime, it’s believed crude oil, and therefore gasoline, could remain cheap for years to come.
The impact on the electric vehicle industry is the obvious one — demand for electric vehicles has been crimped by affordable gasoline.
Tesla sales have been largely immune to that headwind, however, particularly in the United States. Morningstar analyst David Whiston explained:
“A lot of investors think cheap oil is bad news for Tesla, but it’s not that simple. People who are buying Tesla today don’t really care if gas is cheap or expensive. They want it because it’s a status symbol or for the performance or they are very eco-conscious and just don’t want to consume fossil fuels, regardless of what they pay for the fossil fuels.”
The numbers over the course of the past six months seem to confirm what Whiston was saying late last year. Sales of the Nissan (NSANY) Leaf and the Chevy Volt from General Motors (GM) were down sharply in June, and consumer interest in the best-selling (in U.S.) mid-priced EV — the Leaf — is expected to slump even further this summer as the leases from the initial introduction of the electric automobile start to expire.
Bottom Line for Tesla Stock
Though Tesla sales are clearly pointed in the right direction, it should be made clear that Tesla is neither a profitable company nor expected to become profitable this year.
While a scale-up of in deliveries would widen margins for most companies, for Tesla, the scale-up has been and will continue to be costly. The company has set aside $1.5 billion for capital expenditures this year, most of which will be used to further bolster car-production capability and to advance the establishment of its own battery-making facility in Nevada.
The lack of net profits isn’t inherently a problem for fans and followers of Tesla stock. The market has certainly rewarded companies with less of a chance to ever turn a profit, and the current TSLA bulls are eyeing the projected swing to a wide profit of $3.42 per share in 2016.
The analyst community is believing more and more as well, including Bank of America Merrill Lynch. Though it still categorizes Tesla stock as an under-performer, it still tripled its target price on shares from $65 to $180 in the wake of Thursday’s news.
The Merrill Lynch opinion underscores that while things are moving in the right direction for Tesla, valuation could become a considerable probelm for TSLA shares should the story becomes anything less than Cinderella-like. Diminished Q3 deliveries or unexpectedly-high capital expenditures are two ways that could happen. Until that happens though, Musk seems to be doing a pretty good job of silencing the doubters, en route to making Tesla stock more of an investment and less of a speculative trade.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
