Tesla's ( TSLA 5.09% ) fourth quarter is extremely important -- particularly given the stock's soaring price this year. Can Tesla live up to the huge growth the market has come to expect from the company?
Key to keeping investors satisfied will be the company's fourth-quarter vehicle deliveries. Investors will look for the company to follow-through on its optimistic outlook for vehicle delivery growth. In order to hit management's ambitious guidance for 500,000 deliveries this year, the electric-car maker will need to demonstrate substantial sequential and year-over-year growth in vehicle deliveries.
So, how many vehicles could Tesla deliver in the fourth quarter of 2020? Let's take a look.
The path to 500,000 vehicles
When Tesla announced its fourth-quarter results for 2019 on January 29, management set a target for full-year deliveries of 500,000 vehicles. This would translate to about 36% year-over-year growth compared to the approximately 368,000 vehicles Tesla delivered in 2019.
But what management didn't know was that the world was about to get hit with a pandemic that would lead to unprecedented lockdowns, including temporary shutdowns at the company's factory in both Shanghai and the U.S. Indeed, Tesla's main vehicle manufacturing factory in California would end up being shut down for about half of Q2.
Following these shutdowns, management unsurprisingly withdrew its outlook for 500,000 or more vehicle deliveries during 2020. Uncertainty loomed. Yet as time passed, Tesla resumed its wild growth trajectory in Q3, setting new standards for execution on management's growth priorities. Production of Tesla's Model Y ramped up quickly and production output expanded at Tesla's Shanghai factory and the company's factory in Fremont, California. This ultimately led management to once again set a target of delivering 500,000 vehicles this year.
What Tesla needs to achieve in Q4
Delivering less than 180,000 vehicles during the first half of the year, Tesla would need to make massive progress in the second half of 2020 to hit its year-end target for 500,000 deliveries. Record deliveries of close to 140,000 in Q3 helped. But even after this better-than-expected quarter, the automaker will still need to deliver over 181,000 vehicles in Q4. This translates to 30% sequential growth and 61% year-over-year growth.
It's safe to say that the 181,000 deliveries Tesla needs to achieve in Q4 to hit its full-year guidance won't be easy. In fact, the 61% year-over-year growth rate in quarterly vehicle deliveries required to achieve its target notably represents a meaningful acceleration from the 44% growth Tesla achieved in Q3.
Despite how difficult it might initially seem for Tesla to deliver this many vehicles in Q4, there's good reason to believe Tesla might get close. Consider the substantial increase in production capacity Tesla had going into the quarter. Going into Q4, Tesla had the manufacturing lines installed to build vehicles at a rate of 840,000 annually. In addition, a total of three additional production lines were under construction at factories in Berlin and Texas. This compares to annualized production capacity of 690,000 (with two production lines under construction) going into Q3.
Given how aggressively Tesla has been expanding its operations, it wouldn't be surprising to see the company get close to delivering the 181,000 vehicles required to achieve its full-year guidance for 500,000 vehicles. Indeed, it's not out of question for Tesla to surpass this target.
Importantly, hitting its full-year guidance for vehicle deliveries would demonstrate a step-change in the company's annualized production rates, highlighting a good foundation for more significant growth throughout 2021. Further, it would reinforce how well the company has been executing recently, helping provide some support for the wild valuation Wall Street has decided it's willing to pay for the growth stock.