In spite of a few near-term hiccups, including lowering guidance based on a road bump in its efforts to ramp up production and another delay for Model X deliveries, Tesla's (NASDAQ:TSLA) growing confidence about its future has the Street a bit more bullish on the electric carmaker Thursday. Between Tesla's third-quarter letter to shareholders and its earnings call yesterday, there are two major reasons Tesla shareholders can be more confident in the company's long-term story.
Demand is years away from being an issue
This, at least, is how Tesla thinks of demand. And a closer look at the factors that give Tesla such confidence in its unorthodox demand story prove to actually be quite convincing. Turning a blind eye to Tesla's growing optimism about the demand for its vehicles would be a mistake. Perhaps the factors about Tesla's electric vehicles that spark top-notch safety ratings from the NHTSA, mind-boggling ratings from Consumer Reports, and game-changing reviews from Motor Trend actually do speak of an exceptionally compelling value proposition for Tesla vehicles -- what a surprise!
First, for those who eye forecasts with skepticism, there's the hard data we already have: a surprisingly steep trajectory of growth in deliveries for its Model S. Tesla vehicle deliveries in Q3 hit a record high of 7,785 despite the factory being completely shut down for two weeks for retooling. Year over year, Tesla's quarterly sales were up 42%. For Q4, it's guiding for about 11,200 vehicles -- 44% higher than any other quarter and 89% higher than the year-ago quarter.
The ramp-up in deliveries, on a quarter-to-quarter basis, is bound to hit a few detours, as it did going into the fourth quarter with a production deficit of 2,000 vehicles, making Tesla lower its full-year guidance from 35,000 vehicles to 33,000 vehicles. But zooming out depicts a more accurate story of how the company is clearly ramping up production as fast as it can to meet its excess demand.
Looking out further, Tesla predicts that Model S net orders and deliveries will increase 50% in 2015 from its guidance for "approximately 33,000 vehicles" in 2014. This would put 2015 Model deliveries at about 50,000. Tesla CEO Elon Musk said during the earnings call that this forecast is based on a "modest extrapolation" of orders coming in for the luxury sedan and that the company has "high confidence" in this number.
Beyond 2015, Tesla is still extraordinarily confident in demand for its vehicles.
"Being unable to increase production fast enough, not lack of demand, is a fair criticism of Tesla," the company said in its letter to shareholders. "[W]e expect our annual production will increase by over 50% in 2014, again in 2015 and probably for several years to follow."
A 30% reduction in battery costs is easy
When Tesla announced its plans to build a Gigafactory, a $5 billion factory purposed to build enough lithium-ion batteries for 500,000 vehicles per year by 2020, it said it would be able to cut costs for lithium-ion batteries by at least 30% by the end of the first year of volume production. But "experts," who couldn't possibly be as entrenched in the cell production industry as executives at Tesla, have doubted this target.
"We find the Gigafactory will only reduce the Tesla Model 3's cost by $2,800, not enough to truly influence whether this lower-cost EV will be a success or not," Lux Research analyst Cosmin Laslau said in August.
But Musk sharply disagreed in the earnings call.
We felt comfortable with at least a 30% reduction in cost just based on the location and economies of scale. That's without taking any technology improvement into account. And we'll certainly do technology improvement. If we can't get to 30% without technology improvements, someone should shoot us, because that would be in complete defiance of economies of scale and obvious cost savings.
Gathering all the comments from management on the expected sales and plans, going forward, we're still at the beginning of the company's aspirations for huge future sales growth -- an exponential curve investors should have incrementally higher confidence in today after hearing management's commentary on demand and Gigafactory expectations.
While investors should expect actual results in the coming years to vary immensely from Tesla's comments about the future, especially since Musk is always sure to mention that there is a lot of uncertainty in such forward-looking projections, it's just as important not to forget just how ambitious the company is. And it's equally important to take into account management's growing confidence about its ability to grow sales meaningfully each year and its growing confidence on the benefits it will realize from the Gigafactory.