Why Tesla Motors, Inc. Needs a Huge Fourth Quarter

It's impossible to overstate how important Tesla's (TSLA -1.66%) fourth quarter will be for the company in achieving its growth targets for the full year. Not only is Tesla's next big bet on fully electric vehicles, its Model X SUV, due to begin deliveries at the end of Q3, but it also has some ambitious sales targets for its total vehicle sales in 2015, much of which will require huge sales in Q4 to be achieved. And don't forget about the ramp of Tesla Energy deliveries, which is scheduled to take place during Q4.

Model X prototype. Image source: Tesla Motors.

Tesla's big fourth quarter
Why is it important for Tesla shareholders to begin thinking about Q4? After all, isn't it Q3 results that Tesla will share next?

While Tesla's third-quarter financial results and vehicle sales will definitely be important, investors already have considerable insight into the quarter's performance. Tesla said during its second-quarter earnings release that it planned to deliver about 11,500 vehicles in Q3. With this guidance shared more than a month into Q3, and given the fact that Tesla's quarterly guidance has been very accurate in the past, it's likely that actual deliveries won't be far off from this figure. Sure, there will be plenty of other figures shared in Tesla's third-quarter results worth mulling over. But, given the incredible extent of the company's expectations for the final quarter, investors will likely be most interested in Tesla's outlook for Q4 when the company reports third-quarter results.

For the full year, Tesla said in its second-quarter letter to shareholders the company is expecting to deliver 50,000-55,000 vehicles. Knowing Tesla has delivered about 21,600 vehicles year to date and that Tesla expects to deliver about 11,500 vehicles in Q3, this leaves about 19,400 deliveries for Q4 (using Tesla's midpoint for its full-year guidance range).

Quarterly deliveries needed for Tesla to achieve its midpoint in an estimated range of full-year vehicle deliveries. Data for chart retrieved from Tesla's SEC filings for quarters shown. Periods marked with asterisks are calculated based on Tesla's third-quarter and full-year guidance for vehicle deliveries. Chart source: Author.

To add even more perspective of Tesla's reliance on Q4, consider that the quarter's deliveries would need to soar 97%, year over year, to deliver 52,500 total vehicles in 2015 if the company sticks to its forecast for 11,500 deliveries in Q3. This compares to about 54% year-over-year growth in vehicle deliveries in the first half of the year and 48% year-over-year growth expected in Q3.

Dependent on Model X, or not?
Surprisingly, even though Tesla's Model X is due to begin first deliveries by late Q3, comments from management during earnings calls over the last four quarters suggest much of Tesla's ambitious full-year guidance, and its big target for vehicle sales in Q4, is expected to come from Model S -- not Model X. For instance, in Q3 of last year, Tesla suggested Model S deliveries alone in 2015 could near 50,000. Indeed, management went as far as to say that it wouldn't even need Model S sales in China for Tesla to achieve this sort of growth. For Tesla to hit this year-end forecast for Model S sales, the company would likely need to deliver about 17,000 Model S units in Q4 -- 5,500 more than in any other quarter yet, and 73% more than the year-ago quarter.

But, looking beyond an estimate for 49,000-50,000 vehicles deliveries, it seems Tesla acknowledges the company is highly dependent on Model X. Tesla said in its Q2 shareholder letter that a "small number" of its expected 11,500 deliveries would be Model X. But in Q4, Model X is key. Indeed, the move to a range of full-year guidance introduced in the company's second-quarter letter to shareholders for 50,000-55,000 deliveries from a previously stated absolute target for 55,000 total deliveries was entirely so management could leave more room for a wider range of possible outcomes for Model X production and delivery ramp execution.

Tesla explained how important Model X is to Q4 in its second-quarter letter to shareholders.

We are now targeting deliveries of between 50,000 and 55,000 Model S and Model X cars in 2015. While our equipment installation and final testing of Model X is going well, there are many dependencies that could influence our Q4 production and deliveries. We are still testing the ability of many suppliers to deliver high quality production parts in quantities sufficient to meet our planned production ramp. Since production ramps rapidly late in Q4, a one-week push out of this ramp due to an issue at even a single supplier could reduce Model X production by approximately 800 units for the quarter.

Tesla Fremont factory. Image source: Tesla Motors.

And a worse-than-expected Model X production ramp can also negatively impact Model S production, Tesla said.

Furthermore, since Model S and Model X are produced on the same general assembly line, Model X production challenges could slow Model S production.

All of this shows why Tesla's fourth quarter will be critical. The company is setting more ambitious growth targets for itself than it has since it first launched Model S. Can Tesla live up to its own high expectations?