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Could Tesla’s Margins Surprise the Market in 2016?

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Tesla Motors’ current margins

Tesla (TSLA) has industry-leading gross margins, better than those of other auto industry giants such as Ford Motor Company (F) and General Motors (FCAU). Analysts are estimating Tesla’s 4Q15 gross profit to have grown to $416.3 million, with a gross margin of 23%.

TSLA reported a gross margin of 27.4% in the corresponding quarter of the previous year. Its 2015 gross margins are estimated to have shrunk to 24.2% from 27.6% in the previous year.

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During the last year, Tesla’s gross margins might have come down on account of the stronger US dollar and its change in product mix. Last year, the company faced a fall in its average selling prices due to higher deliveries of lower-priced 70 kWh (kilowatt-hours) variants of Model S vehicles. Now, let’s take a look at analysts’ estimates for Tesla’s margins in 2016 and beyond.

Analysts’ estimates: 2016 and beyond

Analysts are estimating Tesla Motors’ gross margins to expand in the coming years. For 2016 and 2017, the company’s gross margins are expected to be 25.1% and 26.9%, respectively. Tesla is expected to reach full production of its Model X vehicle in 2016 with improved production capacity. Going forward, this may help the company spread its fixed costs and boost margins.

Challenges ahead

It will be interesting to see how Tesla plans to maintain its margins with its upcoming mass market electric vehicle Model 3. The company reportedly plans to achieve a 200-mile driving range with this vehicle. This would require a higher capacity battery pack. At the same time, the company will have to keep its target market segment in mind to make the vehicle affordable to the masses.

For the Elon Musk–led company, the competition is also likely to get tougher in 2016. Other established automakers also have plans to mark their presences in the electric vehicle segment. Auto companies (XLY) such as General Motors (GM) and Daimler (DDAIF) have been working on their electric vehicles, which are expected to launch in the coming one to two years.

Continue to the next part of this series for a look at the discussion on factors that may affect Tesla’s stock price going forward.

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