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Tesla's First World Problems

By: Chris Ciaccia
Posted: 11/7/2013 10:26:00 AM
Referenced Stocks: AAPL;F;GM;TSLA

Very few companies today are experiencing such demand for their products that they can't actually make enough. Apple (AAPL) is one, with news of today's added manufacturing partner. Tesla (TSLA) is another one, and while that's an issue for the high-momentum stock, it's actually a great problem to have for the long-term viability of the company.

During the third-quarter, Tesla earned 12 cents per share on $603 million in revenue, delivering 5,500 Model S units. More than 1,000 of the cars went to Europe, as the company actually stopped delivering cars to the U.S. to give some of that production to Europe.

On Tesla's second-quarter earnings call, CEO Elon Musk first acknowledged the company's supply constraints. He did so again on this call, as bulls wondered why the company's guidance for the fourth-quarter would be just under 6,000 vehicles."The main constraint on our production is really is the cells, and I think I have mentioned that before in talks and I think I alluded on that on prior earnings call, so we were addressing the cell supply constraints and any sort of constraints that are non-cell constraints that exist, but the critical thing is the cell production constraints."

Musk went so far as to say that Tesla "had to starve North American demand in order to feed Europe." Tesla is looking at expanding factories, and Musk even mentioned a "giga-factory" to help with the increased production. He said North American demand could sustain 20,000 cars a year, perhaps more, and there could be easily 10,000 car demand seen in Europe. That doesn't include Asia, where Tesla just opened its first store in Beijing earlier this week.

Tesla recently addressed this issue by expanding its agreement with Panasonic for more lithium-ion battery cells, as the company starts to think about the Model X, and continued production of the Model S.

Morgan Stanley analyst Adam Jonas, who raised his price target to $153 with an overweight rating, notes that the third quarter was "very in-line," but there were some positives. He noted that reservation deposit balance increased in to $140 million from $134 million in the second quarter, and the company is ramping up R&D spending for the fourth quarter "to accelerate the Model X product development (with 4Q14 launch unchanged)," both good signs.

Musk noted that he expects the supply constraints to ease next year, and that Tesla, unlike Ford (F), General Motors (GM) or other automakers, is that it's pointless to amplify demand, by expanding to other markets, if the company can't produce enough units.

"The thing that people still don't quite get is that we are different in a fundamental way from other car companies and it doesn't make sense for us to do things to amplify demand if we can't meet that demand of production, so on what we spent our time doing here as a management team is try to figure out how do we ramp up production faster and us to maintain the quality and keep improving the product," Musk said. "That's where we expect to - a lot of these production constraints next year."

Deutsche Bank analyst Dan Galves notes that although Tesla is experiencing some problems with supply, it's still a good bet to be disruptive to the larger auto market. "Volume growth could be massive in the context of an 85MM unit global market," Galves wrote in his note. "And we see meaningful competitive advantages related to the company’s supercharger network and its proprietary powertrain technology."

Though Tesla shares slid 14% yesterday morning following the earnings call, it allows the story to be reset for the longer term, as Tesla continues to work to get supply to meet up with demand.

Given the high price of the Model S (around $110,000 fully loaded), this is definitely a high-class problem to have for a high-class company, and one that should make longer-term believers in the company ultimately happy.