Tesla Motors, Inc. (NASDAQ: TSLA) is a disruptive force in the automobile industry with its long-range electric vehicles. While its existing models as of 2016 are mainly targeted to well-off individuals, the company is working diligently to reduce the cost of production and vehicle prices to broaden its appeal among middle-income individuals. Tesla is investing at a breakneck pace, putting the company in need of capital and prompting it to issue convertible bonds. Investing in Tesla comes with a lot of uncertainty, and its stock can be very volatile if the company's actual growth path deviates from what the investment community expects from it.
Tesla has remained unprofitable since it went public in 2010. With this in mind, analysts tend to focus on the company's gross margin to watch for any improvement in its production efficiencies and pricing power. The gross margin is calculated as a company's gross profit divided by its total sales. The gross margin shows how efficiently an auto manufacturer runs its manufacturing process to deliver vehicles at prices that can achieve the highest possible profitability. From 2007 to 2014, Tesla showed a gross margin ranging from 87.67% in 2007 to -7.74% in 2008, and the average gross margin was 25.3%. For the trailing 12-month period ending on Sept. 30, 2015, the company's gross margin stood at 25.52%.
Tesla continues generating efficiencies from its production lines, as it ramps up the volume of cars it produces every year. With increasing economies of scale, Tesla's gross profit stabilized at around 25% with its flagship Model S and its upcoming Model X. Tesla is investing in its Gigafactory, which is slated to be fully operational by 2020. As the company continues learning by doing and increasing its capacity, its fixed costs are likely to be spread over a larger volume of vehicles, possibly decreasing the sales costs of its cars in the future.
The operating margin is another useful metric that allows investors to evaluate the efficiency of a company in generating profits before any financial and tax expenses. Operating margin includes any overhead costs and selling and administrative (SG&A) expenses that a company incurs to market its products and operate its business. Because Tesla is a relatively young company in the growth stage of its life cycle, the company's operating margin tends to be very volatile and frequently goes into negative territory as it increases head count and ramps up its research and development (R&D) efforts.
From 2008 to 2014, Tesla's operating margin ranged between -532.52% in 2008 and -3.04% in 2013, with an average of -133.15%. The company showed considerable improvement in its operating margin by 2015 due to increasing volumes of production, yet it remained persistently negative. Tesla's operating margin stood at -14.02% for the trailing 12-month period ending on Sept. 30, 2015. Tesla's operating margin remains persistently negative with expectations that it will turn positive in five to 10 years. The biggest contributors toward negative operating margin are the company's pursuit of R&D using in-house capabilities and its extensive marketing expenditures to promote sales.
The inventory turnover ratio indicates how many times a firm sold and replaced its inventory over a certain period of time, typically a year. Because car manufacturers such as Tesla are dependent on selling their inventories as quickly as possible to generate revenues, the inventory turnover ratio is useful in pinpointing any problems a company may have with its inventory. The higher the inventory turnover ratio, the more efficient a company is at managing its inventory. Tesla's inventory turnover ratio has shown an upward overall trajectory from 2008 to 2014, with its average being 3.34, which is significantly below the inventory turnover ratios of its peers. The biggest challenge Tesla faced in the past, and may face in the future, is matching the demand for its vehicles, given the company's limited and slowly expanding production capacity.