Tesla's 25% Profit Margin Is Basically Already in the Bag

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Shorting Tesla Motors ?

I hate to break it to you, but Tesla's aspiration for a 25% gross profit margin, excluding ZEVs, is basically a guarantee. In fact, Tesla is already almost there.

So if your bearish argument includes a bet against Tesla's ability to get its auto business to a 25% gross profit margin by Q4 this year, you might want to apply some whiteout.


The truth about Tesla's margins
"Twenty-five percent? That's a gamble -- Tesla reported a meager 13% profit margin on its auto business in the company's second quarter," uninformed Tesla bears complain.

Let's take this poor argument to the chalkboard and expose it for what it is.

Sure, Tesla's GAAP gross profit margins of 22% provide an unrealistic picture of the company's operational profitability. Sales of ZEVS inflate undoubtedly provide a nice boost. But by no means is the company attempting to cover this up. Four times in the company's second-quarter letter to shareholders management emphasized results excluding ZEVS -- none of which were in fine print.

With that said, here is the company's gross profit margin progress so far in its automotive operations:

Source: Data retrieved from quarterly filings and earnings calls from the first and second quarters of 2013. The gross profit margin reported in the chart refers exclusively to the company's automotive segment, using non-GAAP figures excluding zero-emission vehicle credits.

What about Tesla's path to gross profit margins of 25%? Let's break it down. Ready for the truth?

In the second-quarter earnings call, Musk emphasized that management "has visibility into these numbers ... ahead of time." Even more, he explained that in order for the things that affect gross margin to deliver 25% results on paper, they will need to be in place "about a month before the fourth quarter ... So, you know, essentially things need to be in place next month. And so that's not very far away. So that's why we feel confident enough to reaffirm the 25% gross margin guidance ..."

Fremont factory. Source: Tesla Motors.

In other words, beginning Sept. 1, Tesla is likely already at a 25% gross profit margin, excluding ZEVs. When the company reported second-quarter earnings on Aug. 7, it was already almost halfway through its third quarter. To look just three weeks into the future and be able to reaffirm guidance for that gross margin target is not a gamble.

But, of course, 25% isn't the end goal: Musk has mentioned aspirations to achieve margins that rival those of Porsche.

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The article Tesla's 25% Profit Margin Is Basically Already in the Bag originally appeared on Fool.com.

Fool contributor Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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