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Tesla Motors Earnings: Continuing to Impress

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Tesla Motors (Nasdaq: TSLA  ) reported its third-quarter earnings on Monday. While the Silicon Valley-based electric carmaker posted a loss of $110 million, or $0.92 a share excluding certain items, that was no surprise -- it met the average of analysts' estimates in a Bloomberg survey.

For the most part, the news from Tesla continued to be quite positive, as the upstart carmaker made impressive progress on its plan during the quarter. But despite Tesla's nearly flawless execution to date, a couple of big challenges remain.

Early reviews on the Model S are strongly positive
The big story at Tesla right now is the continued ramp-up of production of its Model S sedan. The Model S's debut has gone extremely well so far: While early efforts to increase production hit some (entirely predictable and routine) snags, CEO Elon Musk said on Monday that Tesla's production line was building 100 cars a week by the end of the third quarter.

Musk noted that that rate has since doubled -- Tesla is now building more than 200 cars a week (or 10,000 a year). That's a critical point, one at which the company starts to generate positive operating cash flow, he said. Production is expected to double again "within four to five weeks" to the company's target production rate of 400 a week, or 20,000 a year.

This ramp-up has been all the more impressive because the cars themselves are getting mostly rave reviews. While one or two reviews of very early examples did report some small quality issues -- Edmunds complained about squeaks in the interior and misaligned  body panels, two areas that have bedeviled lots of other small-volume carmakers -- professional reviewers (including Edmunds) have been deeply impressed by the car for the most part.

Those impressions have already started turning into accolades. Tesla's website proudly trumpets the Model S's selection as Automobile magazine's 2013 Automobile of the Year, the first of what could end up being a series of big-league awards for the sleek sedan. Those accolades have helped keep the orders coming in: Tesla said on Monday that while it has had some cancellations, net "reservations" for the Model S increased to 13,200 at the end of the third quarter from 11,500 three months prior.

Taking steps to reassure mainstream buyers
All of this bodes well for Tesla as it moves toward the next phase of its business. For some time, I have argued that one of the two biggest challenges remaining for Tesla will be to "cross the chasm": to keep finding enough new customers to keep assembly lines humming once the 10,000 or so early-adopter types in its fan base have received their cars.

Building a car that gets great reviews has already taken Tesla a long way toward that goal, but another key to that success will be to convince mainstream buyers that an electric car is just as usable on an everyday basis as a gas-powered one. To that end, Tesla has been talking up its new "Supercharger" network of high-speed chargers that it is placing in rest stops around the country.

The "Superchargers" are high-speed charging stations, developed by Tesla, which can add 165 miles of range in 30 minutes of charging to a Model S with the top-level 85-kWh battery pack. Musk said in a statement on Monday that by the end of 2013, Tesla will have installed these charging stations in high-traffic corridors around the country, enabling "fast, free, purely electric travel from Vancouver to San Diego, Miami to Montreal and Los Angeles to New York."

"Past the point of high risk"... at least until the competition arrives
Musk said on Monday that "Tesla is really past the point of high risk." His point was that the Model S's production ramp-up has gone according to plan, but I'd argue that it's not necessarily true: As I said, Tesla still has two big challenges: to keep finding buyers for its cars, and -- critically -- to prove that it can compete once the world's big-league automakers take aim at its segment.

This may be an under-appreciated risk of Tesla's stock as a long-term investment. Tesla's battery technology, based on laptop-type lithium-ion cells supplied by partner Panasonic (NYSE: PC  ) , is terrific, and by partnering with Toyota (NYSE: TM  ) the company may have (at least to some extent) pre-empted competition from the world's green-car leader.

But if the likes of Nissan (NASDAQOTH: NSANY.PK) or Ford (NYSE: F  ) or General Motors (NYSE: GM  ) or Volkswagen (NASDAQOTH: VLKAY.PK) decide to leverage their R&D advantages and vast economies of scale to build cars that compete directly with the Model S, that will be a huge challenge for Tesla.

And make no mistake: If the Model S continues to look like a big success, there will be big-league competition -- and soon.

Tesla's execution remains impressive, but its long-term prospects remain cloudy. How will the company preserve its margins once better-funded competitors take aim at its niche? Even as I admire Tesla's achievements to date, I'm not high on its chances of long-term success. But while Tesla Motors is a recommendation of the Fool's Rule Breakers newsletter service, there's a different multibagger that has the growth-stock service's attention these days. Find out what that stock is with a free report.

Read/Post Comments (7) | Recommend This Article (3)

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  • Report this Comment On November 05, 2012, at 7:24 PM, ahaer wrote:

    It's cost gm over a billion to develope the Volt while tesla started from scratch and did two cars AND a new plant for half as much. Why exactly are these types of companies a threat to Tesla?

  • Report this Comment On November 05, 2012, at 10:35 PM, oceanfront4me wrote:

    In your article, you state that the critical challenge for Tesla is "to prove that it can compete once the world's big-league automakers take aim at its segment."

    You are ignoring the fact that Tesla's patented technology is WAY AHEAD of their closest technological competitor...the Nissan Leaf.

    Elon gave his analysis/prediction of the Leaf's deficient battery technology in August of 2010 (1st article below) and the symptoms he predicted (loss of battery capacity in hot climates) are now plaguing Arizona Leaf owners. (2nd article below)

    August 5th, 2010:

    TITLE OF ARTICLE: (google it)

    Tesla CEO Rips on Nissan's Battery Technology, Says It's "Primitive" (article appeared over 2 YEARS AGO!)


    "According to reports, Tesla CEO Elon Musk said that he's not worried about being beaten by other companies on a cost per kWh basis when it comes to batteries. In particular, when pressed about the amazing price point Nissan seems to have attained with the batteries that will go in the LEAF (perhaps even as low as $375 per kWh), Musk reportedly said that Nissan uses a “much more primitive level of technology.”

    "Musk believes that because Nissan's battery pack is passively air cooled instead of actively liquid cooled—like Tesla's battery packs—the LEAF's battery temperature will be “all over the place,” and result in “huge degradation.” In addition, Musk reportedly believes that the LEAF will not be able to operate in cold environments and will “shut off” in hot environments. In the past, Nissan has said they are extremely confident that the LEAF batteries will perform reasonably well in both hot and cold environments, but that it will likely see a performance reduction to some degree when operating at extremes."

    THURSDAY, JULY 19, 2012

    TITLE OF ARTICLE: (google it)

    Nissan Leaf range only 44 miles in hot weather; dealerships slashing price.


    "The problem is likely Nissan's air cooling system used for the Leaf's battery."

    The Nissan Leaf is a top player in the electric vehicle (EV) industry, but one major issue that sometimes plagues these vehicles is the battery -- and the Leaf's battey seems to be taking a lot of heat.

    Leaf owners in Arizona have recently complained that their EVs are losing significant capacity in the desert's hot heat. In fact, Arizona Leaf drivers Scott Yarosh and Mason Convey have both testified to this claim.

    "When I first purchased the vehicle, I could drive to and from work on a single charge, approximately 90 miles round trip," said Yarosh. "[Now] I can drive approximately 44 miles on this without having to stop and charge." [Note: it takes 21 hours to fully recharge the Leaf on 110 volts, and 7 hours on 240 volts.]

    Both owners said they've lost about 30 percent of their battery capacity since purchasing their vehicles. Even when their batteries are fully charged, two to three of the 12 lights on their battery capacity gauge are out.

    Both owners are very meticulous about how they care for their Leafs. There is absolutely no sign of abuse, as both were able to produce dealership service records with high marks.

    "We want to learn more about what's going on, but it's something we've just been made aware of, and we don't have any conclusions yet," said Perry.

    The problem is likely Nissan's air cooling system used for the Leaf's battery. Tesla CEO Elon Musk even predicted that Nissan's cooling system would fail the Leaf at some point back in August of 2010.

    Musk said that Nissan's Leaf employed a cheaper air cooling system that would make its battery temperatures jump "all over the place," where cold temperatures would degrade the battery while hot temperatures would shut it down. Tesla, on the other hand, uses a high-end liquid heating/cooling thermal management solution.

  • Report this Comment On November 06, 2012, at 1:56 AM, oceanfront4me wrote:

    The following text is taken from an article entitled, "Why Tesla Motors Is Betting On The Model S

    BY JON GERTNER | MARCH 19, 2012"

    On a more granular level, though, it's not a simple matter to convey how Tesla's technology may give it a comparative advantage over the competition.

    The company has more than 300 patents on its technology, all of them highly technical, and in addition has a fair amount of proprietary engineering.

    In the most general terms, it's probably fair to say that the company's expertise resides in how it has designed the circuitry in its large battery pack, how it cools those batteries, and how its sophisticated software regulates the power flow between the battery pack and the motor.

    The software especially, which can translate into large efficiency gains for a car, may be Tesla's biggest advantage. Straubel notes that one benefit of being located in the Valley, as opposed to Detroit, is that it offers the company a huge pool of software engineers.

    "We're in the best place in the world for that," he says, adding that it goes with Tesla's insurgent approach. Whereas the established car companies tend to approach car design "with a deep comfort with internal combustion engines and a deep skepticism of software and electricity, we're the opposite."

  • Report this Comment On November 06, 2012, at 2:07 AM, oceanfront4me wrote:

    The following text is also taken from the article entitled, "Why Tesla Motors Is Betting On The Model S".

    BY JON GERTNER | MARCH 19, 2012"

    "We're the third-most-shorted stock on the Nasdaq," Musk tells me, looking somewhat incredulous. Then he laughs. This actually cheers him up. "All I can say is if you're shorting Tesla at the end of this year, it's going to sting," Musk says. "It's going to sting a lot."

  • Report this Comment On November 06, 2012, at 6:44 AM, TMFMarlowe wrote:

    @oceanfront4me: There's no doubt that Tesla has done a great job with the Model S so far. If I could actually convince myself to spend $90k on a car (and if I could actually convince myself that its battery pack would last many years without degrading) I'd seriously consider ordering a Model S Performance for myself. But as to whether Tesla really has some sort of insurmountable technical advantage... we'll find out pretty soon, I suspect.

    Also, I don't consider the Leaf to be Tesla's closest competitor at this point, or really a Tesla competitor at all -- Tesla's real competitors right now are gas-powered German luxury cars.

    In any event, JB Straubel is right, the Leaf is already ancient technology. The real question is, how long can Straubel's batteries (and his patents, which may or may not end up mattering much in the grand scheme of things) stand as state of the art, when there are huge sums being spent around the world to turn viable long-lasting electric-car batteries into a mass-market commodity?

    An investment in Tesla requires betting that the answer is "a long time," at least in technology terms -- much more than 18-24 months. I'm not presently willing to make that bet, or to recommend it to my readers.

    John Rosevear

  • Report this Comment On November 06, 2012, at 10:52 AM, oceanfront4me wrote:

    <<Also, I don't consider the Leaf to be Tesla's closest competitor at this point, or really a Tesla competitor at all -- Tesla's real competitors right now are gas-powered German luxury cars.>>

    My point, EXACTLY. No-one else has ELECTRIC VEHICLE technology that comes close to Tesla's PATENTED batteries, drive trains, software, etc.

  • Report this Comment On November 06, 2012, at 12:40 PM, TMFMarlowe wrote:

    @oceanfront4me: I would be very careful with the assertion that nobody else has EV technology that comes close. This field is moving very quickly, largely out of public view. It's fair to say that none of the global automakers have announced a car with such technology -- yet. But show season is about to begin. I suspect that the game is going to change quite a bit over the next 4-5 months or so.

    John Rosevear

    ps: Don't get too attached to the idea that Tesla's patents will prove to be a moat. Or put another way... Tesla's battery approach isn't the only one, and there are reasons to think that it won't be the best one when all is said and done.

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