Tesla Motors Inc is one of the most polarizing stocks in the market at the moment. Elon Musk’s company has become synonymous with EVs and its cars are giving ICEs a run for their money, the demand for its mass-market Model 3 is incredibly strong, and CEO Elon Musk knows how to make all the right moves to make the firm look good – for all these reasons bulls are chanting “Long TSLA”!
On the bearish side of the market, there are worries about slowing demand for the Model S, the Model X recall, execution risk in supplying Model 3 orders in 2017, and the large short float at about 31% – for all these reasons bears continue to chant “Short TSLA”!
However, an important fact that could justify the bullish/bearish thesis in the near term is the firm’s production guidance. In fiscal 2015, Tesla sold a little over 50,000 cars; however, the firm has offered optimistic guidance projecting a 70% increase with a guidance range of 80,000 to 90,000 deliveries in fiscal 2016.
Tesla production challenges pose a good problem
Now, Tesla has a good problem (a problem many carmakers would love to have) because Model 3 preorders were massive. In the first week of unveiling the Model 3, the firm reported 325,000 preorders – recent numbers are closer to 400,000. Musk has said that the Model 3 won’t be out until 2017 but the firm already has a notorious reputation for delays.
If the firm continues to increase its production capacity by 70%, the firm would not produce 400,000 cars until the end of 2019. The firm already has the Model S and Model X in production; hence, most of the people who have placed deposits for the Model 3 won’t see their car until 2019 – that’s if Tesla focuses on making the Model 3 alone for the next three years. It highly unthinkable that Tesla will focus all its energy on building the Model 3 alone because both the Model S and the Model X still have long wait times and orders that are yet to be delivered.
In essence, Tesla must find ways to increase production if it doesn’t want to lose many of the Model 3 preorders because not many people would be willing to wait until 2019 to own the car. Elon Musk understands the need to increase production and in a tweet posted on April he says, “Thought it would slow down today but Model order count is now at 198K”. A couple of minutes later he posted another tweet saying, “definitely going to need to rethink production planning…”
Here’s why raising guidance could be good for Tesla
It doesn’t take much analysis to know that Tesla Motors needs to increase its production in order to meet the growing demand for its cars. However, some investors think that the firm needs to make an official statement about its plan to raise production guidance. The firm has already said that it won’t dilute shareholder equity in a secondary offering or borrow money to increase production.
The firm has planned to increase production gradually and use the revenue from sales to fund expansion plans for increased production. Tesla has about $1.2B in cash and an $800M credit line at the end of 2015; hence, the firm had a plan for increasing production without diluting equity or borrowing more money. However, the plan to increase production by 70% needs to be revised upwards if the firm wants to deliver 400K Model 3 by 2020 at the earliest.
An official statement on an increase in production guidance without diluting shareholder equity or borrowing money could help Tesla in the short term. To start with, Tesla’s share price will enjoy a positive bump. Tesla is already up 4.89% in the year-to-date period, it wouldn’t hurt to have a bit of good news on increased production to sweeten the deal for investors.
An official statement on production guidance could also help Tesla sell more of its high-margin Model S and Model X. The Model S is already facing some headwinds as the European Alternative Fuels Observatory reported that the Model S had a 5.1% BEV market share in Q1 2016, down from its 8.1% full-year share in 2015. The Model X demand is also slowing down as fears on quality issues start to plague the SUV.
Official talk about an increase in production could show potential buyers that they won’t need to wait too long before they obtain a Model S and the short wait time could trigger an increase in demand for the Model S. More so, an increase in production guidance might suggest that Tesla is no longer under pressure for meeting Model X demand and that there would be fewer quality control issues with the SUV. In essence, raising production guidance could help Tesla sell more of the Model S and Model X in order to raise funds to expand its line for the Model 3.
Tesla Motors will be better-served by lowering guidance
On the reverse side of the argument, I think that Tesla Motors will be better served by lowering guidance. Before you crucify me, I know that lowering guidance could be bad for the firm in the short-term; however, lowering guidance could make it easy for the firm to underpromise and overdeliver when its wait time starts to shrink to the surprise of everyone in the market.
To start with, Tesla has already missed its Q1 delivery guidance and it has much work ahead to meet the initial FY guidance of 80k to 90K cars. If the firm raises guidance, many people would expect the firm to miss guidance in the current quarter and full year – Tesla needs to find ways to avoid losing investor confidence.
More so, many people believe that the problems plaguing the Model X, (the recall of 2,700 Model X comes to mind) is a function of Tesla’s mad rush to increase production by 70% this year. Lowering guidance might suggest that Tesla is putting quality over quantity and that there won’t be much problems with its cars going forward.
Lastly, an increase in guidance means that Tesla is planning to increase its production capacity and investors will translate the move to mean that the firm’s operation expenses will increase and that profits will be elusive in fiscal 2016. Many of Tesla investors are buying into the firm because they believe in Elon Musk and his vision; nonetheless, they won’t mind if the company starts posting some profits.
Tesla is currently at an important juncture in its growth story as it moves from being a niche player in the auto market into becoming a carmaker with an active interest in all the segments of the market. However, its ability to meet growing demand without sacrificing quality and without losing investor confidence will be put to serious tests in the next couple of months.