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Tesla’s Post-3Q15 Hopes for 30% Gross Margins over Next 18 Months

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Nov. 10 2015, Updated 1:07 p.m. ET

Gross margins

In 3Q15, Tesla Motors (TSLA) posted gross profits of $231 million with margins of 24.7%. But we should note that these profits were recording on a GAAP (generally accepted accounting principles) basis. On a non-GAAP basis, Tesla posted gross profits of $312 million, and the margin was 25.1%. In the corresponding quarter in 2014, Tesla’s GAAP and non-GAAP gross profit margins were 29.5% and 29.3%, respectively.

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Tesla’s gross profit margins have come down on account of the stronger US dollar and product mix. Moreover, Tesla’s average selling prices have also come down. In its 3Q15 shareholder letter, Tesla said that the “average selling price of Model S declined slightly with the first full quarter of deliveries of our lower priced 70 kWh variants of Model S.”

Competition

In contrast, Ford Motor Company (F) and General Motors (GM) posted gross margins of 15.9% and 17.5%, respectively in 3Q15. Tesla’s gross profit margins are more in the ballpark of luxury carmakers like Daimler (DDAIF) and BMW. Daimler had a gross margin of 21.5% in 3Q15 while BMW enjoyed gross margins of 19.2% in 2Q15.

But 30% margins?

Tesla stated that it aims to hit a 30% gross margin in its automotive operations. CEO Elon Musk said during the company’s 3Q15 earnings conference call that the company’s goal “is to steadily improve gross margin and hopefully exceed 30% on the Model S and Model X vehicles within 18 months, hopefully sooner than that.” But Musk admitted that it would “require an intense effort” for “every fractional point of gross margin.”

Speaking on how Tesla plans to achieve the 30% gross margin target, CFO Deepak Ahuja said, “It’s a combination of various initiative” including “material cost reductions, manufacturing, production efficiencies and labor hours per unit reduction, combined with economies of scale.”

However, Tesla has now been heading for the 30% gross margin target for quite some time. It would be interesting to see if the company hits the goal within 18 months of 3Q15. As of November 3, 2015, Tesla made up 0.56% of the PowerShares QQQ Trust Series 1 ETF (QQQ).

Another concern for Tesla investors has been negative free cash flows. In the next and final part of this series, we’ll explore how Tesla performed on this metric in 3Q15.

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