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Tesla Motors Inc (TSLA) Invests Big Bucks for Slow, Solid Growth: Report

Tesla Motors Inc (TSLA) Factory Freemont, California

Tesla Motors Inc has made good progress in its bid to disrupt the automobile sector. The firm has caused a serious debate on the harmful effects of gasoline engines on the earth and regulators are now forcing better emission standards on carmakers. Tesla has proved that electric cars are a viable means of transportation as its network of Superchargers has settled fears about range anxiety in EVs.

Tesla Motors Inc (TSLA) Model X

Tesla Motors has also shown that the electric vehicle business is good business as the demand for its cars continues to outpace the supply. The firm introduced it’s first car, the Tesla Roadster in 2008, and it currently has the Model S and Model X on the road. The firm is also working on a mass-marker EV, the Model 3, which will be unveiled in the next few months. This piece seeks to revisit Tesla’s growth story with a view to showing how that growth comes at a price.

Tesla is a growth stock

Tesla Motors has consistently shown that it is a growth stock even though it hasn’t turned a profit. The firm sells it cars through a direct sales model and buyers do not mind sitting on a waiting list for months before their cars are delivered. The reviews of the cars that Tesla builds shows that the firm has found the intersection of software, hardware and the automotive process.

Business Insider’s Matthew DeBord notes that the firm’s “vehicles are as a much a software story as a hardware experiment.” Tesla’s cars are by their electric nature innovative, the firm updates the software remotely in the same way that smartphones are updated.  Hence, you don’t need to buy a new model of its cars before you can get new features in your cars. Over the air updates is a major milestone improvement over traditional carmakers who have to release a new car model every year in order to bring even a marginal improvement on their cars to the market.

Tesla showed the power of over-the-air updates with the release of the 7.0 software update. This update gave the Model S the ability to practically drive itself.  Parking, lane changing, traffic aware cruise control are all part of the cars features now.  And the more recent 7.1 update added a “Summon” feature that allows the car to park the car while the driver watches from outside the vehicle.  And when the driver is ready to use the car again, it can pull out of the garage on it’s own to meet him.

The firm has confirmed its growth story with impressive share price gains. The firm has increased its share price by more than 1,000% since it became a public firm in 2010. The stock now boasts a market cap of $26.65B. More so, Tesla is working towards maintaining a lead in the EV market as it wants to increase its annual production from the current 50, 000 cars per year to 500,000 cars per year by 2020.

For Tesla Growth comes at a price

It is very easy to mistake Tesla Motors for a tech stock because of the connectivity between software and hardware in its cars. In fact, some analysts claim that Tesla is a tech firm that happens to be in the business of making cars. However, the reality is that Tesla is an automobile firm and the sooner investors understand this, the earlier they’ll be able to have fair expectations from the firm.

Tesla is an automobile firm and it can only increase its revenue and profit by increase the volume of cars it produces. There is huge demand for Tesla’s cars (shown in the long waiting list) but the firm can’t turn that demand into revenue and profit unless it builds the cars in the first place. Tesla Motors needs to invest serious money into achieving economies of scale before it starts to make profit from the strength of numbers.

For instance, Tesla Motors needs to get its Gigafactory to full operation so that it can build batteries at a cheaper cost, but the firm needs money to build the Gigafactory. More so, the firm will need to expand its assembly line to accommodate the production of the Model S, Model X, and the upcoming Model 3. Setting up an assembly line and tooling the factory for production of cars also costs money.

A tech firm such as Facebook or Netflix sees an exponential increase in their revenue and profit margins as they scale. Hence, when tech firms grow they only need to make relatively “marginal” investments in their infrastructure to accommodate the growth.  Tesla might continue to see sharp increase in its share price as it creates buzz around new features in its cars; however, shareholders will need to wait for a couple of years before they can see “real” gains from their investments.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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