Editor's Welcome 

Welcome to a special edition of Tesla Weekly where we'll do a deep dive into the recently released Q3 earnings by Tesla. I'll analyze the most significant portions of the earnings release with depth that you most likely won't find in any mainstream media outlet.

Before we look into Q3 earnings, there were some non-earnings news this week I'll highlight first.

  1. Motortrend gave a raving review of the new P85D calling it "among the most shattering few seconds of my life." We're bound to see more reviews of the P85D and I'll bet they'll all share the common theme of how unbelievable the acceleration is. The Motortrend article also mentioned the following (which I haven't confirmed with Tesla), "During a chat with Musk at the P85D's introduction, he mentioned that on average, Tesla implements about 20 modifications to the car per week. Not software, mind you, but actual hard parts. Per week."

  2. Tesla received Europe's NCAP 5-star Safety Rating and released a blog post about it saying "Model S is the only car this year to have achieved both a 5-star Euro NCAP rating and 5 stars in every NHTSA subcategory, including frontal impact, side impact, and rollover. Only two other cars have earned the same recognition since 2011 (when NHTSA introduced its latest rating scheme)."

  3. Autoexpress shared an interview with Chris Porritt (VP of Engineering) where Chris talks about the upcoming Model 3 saying "We want this car to be £30,000 to £35,000 with derivatives which will appeal to all sorts of people. SUVs, estates [station wagons] – who knows?” My guess is that the Model 3 will be released as a sedan, then a compact SUV crossover, followed by a coupe/convertible.

If you haven't already, get started understanding Tesla's Q3 earnings by reading the following:

  1. Tesla's Q3 2014 Shareholder Letter

  2. Tesla's Q3 2014 Earnings Call transcript

DaveT, Editor

Tesla EnergyTesla Energy

Gigafactory to open in 2016

One of the surprises of Q3 ER was Tesla sharing that the Gigafactory would start producing batteries in 2016 (just 2 years away). Apparently Tesla building out the Gigafactory in phases and will gradually increase production.

The shareholder letter shares "Future capacity investments extend to the Gigafactory where we have already started to pour concrete for the foundation. A modular build strategy is enabling us to scale construction, capital requirements and capacity commensurate with growing demand. Together with Panasonic we are making good progress toward first cell production in 2016, slightly earlier than originally scheduled. Starting operations earlier will reduce ramp-up risks for Model 3 and provide some potential expansion capacity for Model S and Model X."

The Gigafactory coming online in 2016 is good news for the Model 3, as it shows that Tesla is taking serious steps to prepare for the mass market ambitions of the Model 3.

Model SModel S

Tesla faces production challenges after factory retooling.

Tesla guided for 7800 deliveries and 9000 cars produced in Q3. They ended up delivering 7785 (15 short of their 7800 goal) and producing 7200 cars (1800 short of their 9000 goal). The reason for the production shortfall was that the major retooling shut down the factory longer than expected (they were expecting 2 weeks but it was shutdown for almost a month), and it appears that there have been challenges in ramping up production as well.

As a result, Tesla lowered their 2014 guidance to 33,000 deliveries (down from 35,000 guidance). Even Tesla admitted in the shareholder letter "Being unable to increase production fast enough, not lack of demand, is a fair criticism of Tesla."

If one were to look at just these numbers, you'd expect investors to be disappointed by Tesla's Q3 earnings but there were some bright spots in the earnings that show Tesla is continuing to execute and even more importantly that demand for the Model S is continuing to grow.


Model S demand continues to grow

The shareholder letter says "We also substantially broadened the appeal of the Model S by introducing Dual Motor all-wheel drive and Autopilot. Based on net orders since that introduction, excluding the extraordinary initial demand peak, we are confident of a 50% increase in both net orders and deliveries for Model S alone in 2015."

A 50% increase from 2014 would mean 50,000 Model S vehicles delivered in 2015. In the conference call Elon mentioned a few times that he think demand could be as high as 70,000 orders for the Model S next year, but he says "conservatively" at least 50,000. This is great news for Tesla and TSLA investors, as it shows that Tesla is seeing robust and growing demand for the Model S.

Elon also mentioned in the conference call that "We're growing our production by like 50% a year, year-over-year as far into the future as we can reasonably project."

I think the growing Model S demand makes sense for several reasons:

  1. The Model S is getting better as Tesla is implementing continuous improvements to the car.

  2. More and more people are finding out about Tesla and the Model S (via satisfied owner, stores, media, etc) and this serves to grow demand as well.

  3. Adding dual-motors increases Tesla's addressable markets in areas where all-wheel-drive cars are popular.

  4. Adding the Autopilot hardware suite for no additional cost to new Model S vehicles essentially makes the car a better value as customers are getting more for the same price.

  5. Tesla is continuing to roll out new Superchargers and service centers and this helps to increase demand for their cars as well.

In the bigger picture, growing demand is probably the lifeline of an ambitious company like Tesla. In fact, fast-growing demand can cover a lot of mistakes in a young company.

Model XModel X

Model X delayed to Q3 2015

The shareholder letter shares "we now expect Model X deliveries to start in Q3 of 2015, a few months later than previously expected."

Some people (especially some Model X reservation holders) are disappointed by this piece of news as they were eagerly waiting for the Model X release sooner.

Personally I think this is mostly a business decision. Pushing back Model X allows Tesla to avoid the complexity of introducing a new model too soon, especially since they have new versions of the Model S going out with dual-motors. Also, it allows Tesla to place the Model X almost smack in the middle of the timeline between the Model S and Model 3, thus evening out revenue growth so that it's more steady going into 2015-2017. The steady revenue growth will be helpful to raise more money in the future.

Put simply, Tesla is delaying the Model X not necessarily because it can't release it sooner but rather because it's better for Tesla (and ultimately Tesla's customers) to release the Model X later.

I have no doubt though when the Model X is released that it will be a big hit. Already the dual-motor powertrain for the Model X is already being rolled out in the Model S D versions. And with more time, Tesla will be able to make sure the falcon doors and second row seats (apparently they'll likely be rotating) are as near-perfect as possible.

Model 3Model 3

Model 3 motor already in the P85D

In the conference call Elon Musk shared that the front motor for the P85D is a precursor for the Model 3 motor.

The front motor of the P85D is 221hp (vs 470hp in the rear). The 221hp motor is basically version 1.0 of the Model 3 motor and it gives Tesla an opportunity to make improvements over time before the release of Model 3 in 2017.

As we go into 2015, we'll see Tesla show more of it's focus and preparation for the Model 3. As Elon shared at the June 2014 TSLA shareholder meeting the Model 3 is the "Holy Grail". More and more over time we'll see Tesla rally around and focus on the Model 3.

TSLATSLA

Overall, Tesla experienced some production hiccups in Q3 but continued to execute toward their greater Model 3/mass-market vision. They're seeing robust and growing demand for the Model S, which has only become even more appealing after the release of the dual-motor version and Autopilot sensor suite.

Tesla's 2014 guidance is now 33,000 deliveries (vs 35,000 production) and their Q4 guidance is $0.30-0.35 eps non-GAAP.

Following the Q3 report most analysts have kept their previous price targets and ratings on TSLA.

And lastly, mostly for fun, Ron Baron shares his bullish TSLA bet in this short video interview.