Trading at 10 times sales, the expectations for Elon Musk's Tesla Motors (TSLA 4.96%) in 2014 are certainly high. "High," in fact, may not even fully encapsulate just how extreme the expectations are for the company. The company is essentially priced to become a major player in the auto market within a few years. For this reason, vehicle production will make or break Tesla's performance in 2014.
Fremont factory. Source: Tesla Motors.
Supply limitations
Sales are soaring, but they are limited by supply; Tesla sells every vehicle it makes. Though Tesla's sales in 2013 took the world by surprise, they're not indicative of the demand for Tesla's vehicles one bit.
Consider this: Tesla doesn't have a budget for advertising. In fact, Tesla hasn't spent any money on advertising at all: "Demand exceeds supply, despite no advertising, no discounts and no paid endorsements," Tesla said in its most recent letter to shareholders. Free word-of-mouth advertising alone is doing the job for Tesla.
Though it's great that Tesla doesn't need to spend money on advertising, does it really matter if Tesla can't significantly ramp up production? After all, the last three quarters have shown little promise that Tesla is capable of rapidly ramping up production beyond where it is today.
Source: Data retrieved from respective Tesla quarterly letters to shareholders.
Then there was the largely disappointing conservative guidenace for the fourth quarter. Tesla only guided for 5,900 vehicle deliveries -- just 7.3% more than Tesla delivered in Q3.
And demand is likely about to get supercharged:
- Tesla's charging infrastructure is expanding rapidly, both in the U.S. and Europe.
- 2014 will be Tesla's year of European sales; the company has only delivered 1,000 supply limited vehicles to Europe so far-- beginning last quarter.
- Tesla is aiming to begin deliveries in China during the first quarter of 2014,and it's already taking hundreds of orders there (without any advertising).
- Tesla plans to introduce its fully electric Model X SUV toward the end of 2014.
Can we expect Tesla really to be able to ramp up production to meet the likely boost in demand in 2014 that will result from its aggressive expansion? If Tesla keeps its word like it did in 2011 and 2012, we can. Since 2011, Tesla has been saying that it could rapidly arrive at a rate of production for the Model S where it would deliver 20,000 vehicles per year. And here we are, going into Q4, with Tesla guiding for a total of 21,500 of the Model S delivered in 2013 -- the first full calendar year of Model S deliveries.
So what is Tesla's updated expectation? It's twofold:
- Begin deliveries of Model X in limited quantity toward the end of 2014.
- Reach an annualized rate of deliveries of 40,000 units per year by late 2014.
Not only is Tesla guiding for this achievement, but Tesla also took action at the end of October when it announced an agreement with Panasonic for a significant boost to lithium-ion supply. And in Tesla's third-quarter earnings call Tesla CEO Elon Musk even mentioned that the company is considering building the world's largest lithium-ion factory -- they're calling it the giga factory.
What will drive the stock?
While production may be the underlying factor driving Tesla's business in 2014, forward-looking comments and guidance from management may be the major driver for the stock price. Why? Sure, production is a critical factor, and it will be watched closely; but results beyond 2014 are already priced into Tesla's share price. Particularly, investors are eyeing the company's plan for its third-gen affordable electric vehicle, which Tesla plans to bring to market in 2016 or 2017.
So, going into 2014, Tesla investors should keep close tabs on both production progress and forward-looking comments from management -- particularly comments concerning its plans for a more affordable electric car.
