Tesla Motors (TSLA 12.06%) announced third-quarter results earlier this month that narrowly beat analyst estimates for the period. The electric carmaker posted non-GAAP earnings of $0.02 per share, which topped Wall Street's expectations for a quarterly loss of $0.01 per share. Meanwhile, revenue doubled to $852 million in the period, as Tesla delivered a record 7,785 Model S vehicles. Unfortunately, the company's decision to push back delivery of its upcoming Model X along with lower guidance for full-year deliveries was what most people were talking about following the earnings call.
Striving for perfection
Tesla Motors now expects Model X deliveries to begin during the third quarter of fiscal year 2015. This is the third time the upstart automaker has pushed back initial deliveries of its highly anticipated Model X crossover vehicle. In fact, many reservation holders have been waiting for their Model X since 2012, when Tesla first began accepting preorders. This has undoubtedly caused some frustration for Tesla's customers. However, investors need not worry.
Tesla is playing the long game, and if that means delaying deliveries in order to get the best possible product to market, then that's something long-term investors should get behind. The company's zero-emissions Model S sedan, after all, was delayed by an entire year. Yet once the Model S finally hit the road, it collected seemingly endless accolades, including Motor Trend's 2013 Car of the Year award. "We prefer to forgo revenue, rather than bring a product to market that does not delight customers," said Elon Musk, Tesla's chief executive, in the Q3 shareholders letter.
Source: Tesla Motors.
This strategy has worked well for the California-based company thus far. "I do think the X is going to be something quite special. But it is hard to engineer and hard to produce," Musk explained on a recent call with analysts. "I think people will appreciate that we got the details right," he continued. "It is like the difference between a diamond with a flaw and a diamond without a flaw, but it is damn hard to do that. But that is what we are going to do."."
Ultimately, Model X could become Tesla's best-selling EV yet if the vehicle is as "special" as Musk proclaims.
Ramping up production too slowly
Weaker overall deliveries for 2014 were another concern analysts had following Tesla's third-quarter results. Tesla produced 2,000 fewer cars in the quarter than management had originally expected because of "system integration challenges" that occurred as Tesla transitioned to its new higher-volume assembly line. As a result, the company now anticipates it will deliver around 33,000 cars this year, a 5%-7% decline from previous full-year guidance. For long-term investors, this isn't cause for concern. Even at just 33,000 deliveries, that would still be a 50% improvement over last year's output.
Importantly, this deficit is not an issue of stalled demand, as some headlines have suggested. Musk made it abundantly clear that the updated guidance was not a result of slowing demand when he spoke to analysts last week. He wisely pointed out that Tesla does not pay for advertising or endorsements. Specifically, Musk said, "We don't pay anyone to pretend that they like our product. If you see our car in a movie we didn't pay for it to be there, it's just there."
Musk has a point. If Tesla was in need of increased demand, the company could easily build brand awareness by advertising its electric cars, paying for celebrity endorsements, and opening additional retail stores. However, it hasn't needed to do this because demand continues to outpace supply. Moreover, by the end of 2015, Tesla expects to ramp up production to more than 2,000 cars per week.
What it comes down to is this: Tesla Motors is sacrificing near-term profits for long-term success. The company is thinking big-picture, and investors should as well.
