REUTERS/Stephen Lam Hard to build.
Tesla reported fourth-quarter and full-year 2014 earnings on Wednesday. The results were a disappointment: a miss on revenue, and big miss on earnings, and weaker deliveries of cars in the final quarter of 2014 than expected.Â
That didn't prevent CEO Elon Musk, fresh off a rocket launch by his other company, SpaceX, to back down when he held a conference call with analysts after earnings were announced.
He said that Tesla was going to spend a huge amount of money in 2015 to achieve an ambitious production target of 55,000 vehicles (2014 saw the company built 35,000 cars). In a research note on Thursday, Morgan Stanley auto analyst Adam Jonas expressed his astonishment:Â
[T]he company is targeting capex of $1.5bn in 2015, a figure nearlyÂ double our expectation and up 50% [year-over-year]. Guidance for operating expenses upÂ nearly 50% [year-over-year] is more than 40% above our forecast (mostly due to risingÂ R&D expenses).While [fourth quarter] cash burn of $86mm was roughly in line with ourÂ expectations, we look to our 2015 forecast expecting far, far greater levels ofÂ cash consumption than the $40mm we have currently modeled.
Jonas thinks such insane spending levels â€” in his estimation â€” support Tesla's goal of building 500,000 cars by 2020. That's 200,000 more cars than Morgan Stanley has baked into its own model, which is currently supporting a $280 target price (Tesla has been trading around $2o0 at the beginning of 2015, well down from its peak of $291, hit in September 2014.)
Tesla was trading down 6%, to $200, when the markets opened on Thursday.
Yahoo Finance Tesla swooned after earnings.
It's fine for Jonas to revise his modeling on this front, but it's been abundantly clear that for Tesla to get from an annual production of 35,000 cars to 55,000 ... 200,000 ... 300,000 ... and eventually to Musk's goal of 500,000 by 2020 is going to be wildly expensive.Â
On the plus side, Tesla doesn't really seem to have any significant demand problems. True, getting established in China has been rougher than the company anticipated. But that shouldn't surprise anyone. Well-established car-makers can have trouble in China. And Tesla is operating on an import-only basis, rather than working with a Chinese partners to produce its cars in the country.
Demand is so high, in fact, for the forthcoming Model X SUV that Musk last year said that Tesla was discouraging customers from putting down deposits on it. Thousands of pre-orders have been booked for the vehicle, which is currently undergoing testing and is slated to begin deliveries later this year.Â
Bill Pugliano/Getty Images The Tesla Model X.
Tesla also doesn't have an image problem. This is the hottest car company on Earth. It spends essentially nothing on advertising. Musk can move the needle and generate incredible anticipation for just about anything the company does just be sending out a tweet in the middle of the night.
But Tesla does have a production problem, and that problem was on display for the second half of 2014.Â
Again on the plus side, the company was able to hit its manufacturing targets, but it had to go like hell at the end of the year. The effort was "Herculean," according to the company, and so exhausted workers that Tesla sent them all on vacation for the first week of January. Retooling the assembly line to build the all-wheel-drive Model S "D" â€” along with some quality control issues, shipping, weather, and customer vacations â€” forced Tesla to play frantic catchup at year-end, which caused the delivery delays: 1,400 cars that were supposed to be in customer hands in 2014 didn't arrive until early 2015.
Kevork Djansezian/Getty Images We can build them.
According to Tesla's shareholder letter, the company is ramping up production at its main factory in Fremont, Calif. and at several other locations.Â
But it's important to remember that Tesla is a car company with a very high market cap â€” $25 billion â€” that is currently buildingÂ one car atÂ one plant.
The auto industry is extremely capital intensive. Major car companies can burn billions each month to stay in business.Â
So while Tesla has certainly rewarded anyone who invested around the time of the IPO, when shares were priced at $17, if you're looking at Tesla as an investmentÂ now, you have to understand that the company needs to spend, spend, and spend some more to simply be able to build enough cars to satisfy what does appear to be healthy demand.
This is a good problem to have: too much demand, not enough production. But it's only a good problem if you can afford to raise production and execute on the new products that are feeding that demand.
Musk told analysts that Tesla intends to avoid future capital raises and plans to fund its objectives out of the cash that the company generates from operations. Maybe Tesla can pull this off. The company has raised money in the past by selling pieces of itself to other companies, and there could be more of that in the future.
But ultimately, the Tesla financial story, which has dominated for the past year as the stock has surged, is being supplanted by the story of a company that builds very expensive, very complicated things maturing into the company it believes it needs to be.
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