In the wake of Tesla's (NASDAQ:TSLA) first-quarter earnings release and the headline announcement that the electric-auto maker plans on accelerating its production ramp by two whole years, a lot of people (bulls and bears alike) have been wondering if CEO Elon Musk has lost his mind. As if the plans weren't ambitious enough to begin with, the new hopeful production ramp looks downright crazy.
Here's the thing: Even if Tesla misses its mark, it'll still be impressive.
Can Tesla become "the best manufacturer on Earth"?
Many industry pundits are starting to realize what Musk is up to. Slate's Will Oremus hypothesizes that Musk uses seemingly impossible goals as a way to motivate him and his team to accomplish the improbable. Bloomberg's Tom Randall even dubs this strategy the "Musk Doctrine." It is also true that laying out these plans publicly will help Tesla justify a capital raise in the near future to current shareholders, who will have to take a hit in terms of dilution (assuming that Tesla raises equity capital instead of debt capital).
Tesla will undoubtedly face an uphill battle as it attempts a historic production ramp. In the likely event that Tesla falls short of its target of 500,000 annual production volumes by 2018, it will still be an accomplishment in absolute terms. For example, let's say that Tesla "only" hits 300,000 vehicles produced in 2018. That would still be a sixfold increase from the 50,000 cars that the company made in 2015. That theoretical figure would also represent a compound annual growth rate of nearly 90% from 2016's expected volumes of about 85,000 vehicle deliveries (midpoint of guidance). No mature auto company can hope for those types of growth rates, since their unit volumes are already so large.
Of course, this is still predicated on the hope that Tesla is able to get somewhere close to its target. To be clear, the company's execution in the coming years will all be about production and manufacturing, since we already know the demand for Model 3 is there. Musk is committed to making Tesla "the best manufacturer on Earth," which is a loaded statement since volume manufacturing is the hardest part of building an auto company and is arguably also Tesla's greatest weakness.
Playing with fire
In potentially overpromising, Tesla is setting up the possible expectation that it will under-deliver. While I still think Tesla could generate impressive growth in absolute terms, the market doesn't always look at things in absolute terms. Investors have a tendency to anchor on expectations. It's quite common for a company to report strong results in absolute terms, but fall short of the Street's expectations -- and shares get punished.
Tesla's limited operating history has seen several exceptions to this rule, though. Shares have performed well over the past few years, in spite of Model X delays. Tesla lost way more money than expected in the fourth quarter, but shares rallied over the following couple months. Tesla did better than expected with first-quarter results, but shares sold off after the release.
Eventually, investors might start reacting more rationally based on their expectations, like they do with most other stocks. Messing with expectations is a dangerous game.
Evan Niu, CFA owns shares of Tesla Motors, and has the following options: long January 2018 $180 calls on Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.