"Well I really don’t think we’ve got any kind of demand challenge in China. In fact I was blown away by my visit to China at the level of interest and enthusiasm for Tesla and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry and sort of consumers in general. And I’m really optimistic for how things will go there," said Tesla (TSLA) CEO Elon Musk.
Let that comment sink in for a minute.
Now a minute longer.
Though Musk, 42, has always been a bit of a showman, for him to say that China, the world's largest auto market and simultaneously the world's largest luxury auto market, is going to be a huge opportunity speaks volumes, especially considering how early it is for China and electric vehicles.
The biggest issue right now for Tesla in China is the fact that the company is continuing to build out its infrastructure there, which includes service centers and the Supercharger network. Musk noted there's less of a focus on Tesla retail stores in China, and more on services and Supercharger network.
Deutsche Bank analyst Rod Lache, who has a $220 price target on shares, wrote, "Importantly, Tesla’s Q1 comments reinforced our view that strong growth will likely continue well beyond 2020, as [management] expressed an intent to expand beyond their current vehicle assembly footprint with manufacturing in Europe and China within a few years."
During the call, Musk went on to say that though he doesn't have a crystal ball, presumably over time, China would become the biggest market for Tesla. Considering the fact that there is no problem for demand for the Model S in China, Tesla is moving as fast as it can in China. "And my instructions to the China team are to spend money as fast as they can spend it without wasting it," Musk said on the call. "That’s what is happening."
Right now, Tesla is limiting the amount of cars being sent to China, because otherwise the rest of the world will not receive deliveries. Tesla is still supply constrained, due largely to the battery cell issue. Tesla reached a deal with Panasonic late last year to increase lithium-ion cell production, but Musk said in the shareholder letter this issue would be resolved in the second part of 2014.
This comes after Tesla earned 12 cents a share on $713 million in revenue, as it delivered 6,457 Model S units for the quarter. Non-GAAP gross margins were 25.4% for the quarter, slightly ahead the 25.2% it reported in the fourth quarter. Analysts were expecting Tesla to earn 10 cents a share on $699.09 million in sales.
For the second quarter, Tesla expects to deliver about 7,500 Model S units, and said it will surpass 35,000 deliveries this year.
The biggest problem right now in China, Musk noted, is that the wait times in China are "really long," with the average wait time for the deliver of a Model S around 4 or 5 months.
Though Tesla and Musk hyped up China as the company's next big opportunity, not everyone is a believer.
Bank of America Merill Lynch analyst John Lovallo, who has a $75 price target on Tesla, is skeptical about the company's statements.
"The Tesla bull case appears to change with every press release or tweet issued by the company," Lovallo wrote in a note. "This, in our opinion, is a testament to management’s ability to successfully promote the story and accentuate the positives." Lovallo went on to say that if the electric vehicle market is strong in China, then the Chinese government would have no problem promoting and giving incentives to a Chinese company, much as it does with tablets and smartphones.
"While China is clearly a large and rapidly growing auto market, we believe that if significant electric vehicle demand was ever to actually materialize, the Chinese government and companies would have great incentive to seize the opportunity to finally create a national champion OEM [original equipment manufacturer]."
For now, Tesla's opportunity in China is massive, as it builds out its infrastructure and customers continue to take deliveries of the Model S. After the initial deliveries are taken, it's up to Musk and team to continue building out that narrative and make the bulls dreams come true.
I certainly wouldn't put it past a guy who has launched a rocket into space, would you?