Can TSLA Stock Beat Expectations?
As we approach the end of another quarter, all eyes are turned to Tesla Motors, Inc. (NASDAQ:TSLA). Elon Musk, knowingly or not, has primed TSLA stock for a huge run, so investors need to keep their eyes open for a big price movement.
I’ve known more than one analyst whose skepticism of Tesla shows a deep misunderstanding of how technology evolves. “If Elon Musk is so great, how come he doesn’t build an affordable electric car?” they ask with frustration. “Don’t worry,” I tell them, “he’s working on it.”
After all, Tesla is planning to bring its “Model 3” to market by 2018. We’ll get a glimpse of the design before then, but if history is any judge, the car will probably be elegant and sophisticated. Tesla’s design engineers have a knack for that.
But the defining feature of the Model 3 is its price. Starting at $35,000, the car will open Tesla to a broader consumer base than it currently enjoys. Obviously, that kind of growth could catapult TSLA stock to new heights, but Elon Musk first needs to prove that Tesla can scale up its volume. (Source: “Confirmed: The $35,000 Tesla Model 3 Will Be Unveiled in March 2016,” Popular Mechanics, September 3, 2015.)
That’s the big question mark looming over Tesla this week.
Tesla NEEDS to Meet Delivery Promises
You see, Tesla recently started shipping out its newest car, the “Model X,” while also ramping up production of its “Model S” edition. Investors are curious about Tesla’s ability to handle its own growth. Does the company have the production capacity to meet its own promises? Let’s take a look.
Elon Musk promised 55,000 cars for the entire year. Eventually, that target got looser, ranging from 50,000 to 55,000, before finally lowering the upper bound to 52,000. In doing so, Tesla cited a recall and Model X design issues as one-time delays that aren’t representative of the firm’s growth.
I can accept that reasoning if, and I can’t stress this enough, Tesla meets its delivery estimate for the final quarter of 2015. Fourth-quarter deliveries should be released this coming weekend. According to the Q3 letter to shareholders, Tesla is expecting between 17,000 and 19,000 deliveries in the last three months. (Source: “Tesla Motors – Third Quarter 2015 Shareholder Letter,” Tesla Motors, Inc. web site, November 3, 2015.)
It’s incredibly important that Tesla hits the mark this time. Many observers, myself included, could grow wary of the company if it seems incapable of managing its own growth. Luckily, the signs look good.
Several weeks ago, Elon Musk hinted that Tesla would be hiring software programmers en masse soon. He understands that investors could shorten Tesla’s leash if the company fails to meet expectations again, so I take his optimism as a good sign. (Source: “Tesla plans to hire thousands more as competition heats up,” MarketWatch, December 29, 2015.)
Proving that Tesla can scale its production could buy the firm enough leeway to reach its dream of an affordable electric car.
Going Forward for TSLA Stock
Elon Musk understood that the road to a cheap electric car started at the top of the price ladder. A low-volume, high-margin strategy was the only thing that made sense.
Think about it: Econ 101 tells us the cost of production goes down as volume goes up. That means any car Tesla started with would be pretty costly to manufacture. It wouldn’t have a plant that churns out one million cars a day, so it could either strip down the car to its bare minimum or raise it to luxury status. Luxury was definitely the way to go.
If you bought an electric car, even if it was cheap, you effectively placed a boundary on yourself. There were no electric charging stations before Elon Musk came along.
Thou shalt drive no further than thy battery allows. That was the reality.
Only a small group of people would be willing to do that for an unexceptional, inexpensive car. But people might be willing to pay more for a niche, luxury toy like the Tesla “Roadster.” Then using the profits off that car, Tesla could expand its network of charging stations, making the next model attractive to a wider set of people.
And so on and so on.
Considering that low-cost cars also have razor-thin margins, Tesla would likely have gone bust if it launched a price offensive. Elon Musk needed to innovate on the business and technological fronts simultaneously, which he did in spectacular form.