Long-Term Investors Should Ignore Q1 Blip For Tesla Motors, Inc.

  • News that Tesla had missed Q1 delivery estimates has halted the rally in Tesla stock.
  • Tesla attributed the miss to manufacturing difficulties for Model X.
  • Long-term investors should however focus more on Tesla's long-term goal of achieving 500k deliveries and becoming profitable.

For all the buzz and hoopla surrounding the record pre-orders that Tesla (NASDAQ:TSLA) has received for Model 3 so far (325k orders as per the last update) news that Tesla had missed its Q1 delivery target by quite a margin has thrown a spanner in the works and caused the stock to start pulling back from its strong rally.

Tesla Stock 5-Day Returns

TSLA-1

Source: CNN Money

Tesla reported that it delivered 14,820 vehicles during the first quarter, below its forecast of 16k. That number included 12,420 Model S and 2,400 Model X vehicles. Tesla blamed the miss on:

''severe Model X supplier parts shortages in January and February that lasted much longer than initially expected,"

and

"hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house"

But Tesla also added that:

"Once these issues were resolved, production and delivery rates improved dramatically."

Despite the miss Q1 deliveries were 50% above last year's mark. Further, Tesla reiterated that it still remains on track to hit its full year delivery target of 80k-90k units. Although Tesla's full year forecast sound ambitious, it appears quite achievable when you consider that the company reported that the build rate of Model X had hit 750 units/week during the last week of March, which works out to 29,250 units for the remaining nine months of the year and more than 31k for the full year.

Tesla is of course judged very heavily by investors on its delivery numbers and targets. It hardly comes as a surprise that the Q1 miss tempered the enthusiasm surrounding Model 3 orders. Investors are probably worried that the same production difficulties that have plagued Model X might re-appear to haunt the company when Tesla commences production of Model 3 sometime in 2017. Tesla anticipated these kinds of concerns by investors and did its best to assuage those fears:

"Tesla is addressing all three root causes to ensure that these mistakes are not repeated with the Model 3 launch,"

Tesla investors can be forgiven for feeling a bit jittery after the delivery miss. Tesla as a mass manufacturer of EVs is unchartered waters. The company has so far collected 325k pre-order on its books and still counting. Assuming Model 3 pre-orders level off at around 380k-400k and only half of those orders manage to convert to actual sales, it implies that Tesla will have to manufacture almost four times as many vehicles in 2017/2018 as it did in 2015. That's a really huge ramp. Meanwhile, if those pre-orders convert at Tesla's historical 70%+, then the company will clearly have its work cut out. Investors should however remember that Model 3 is designed as an affordable car for the mass market and is not anywhere near as snazzy as Model X. Model 3 is likely to be production-constrained not due to manufacturing difficulties but rather due to excessive demand which is something different altogether.

Over the short-term, investors fear the risk that anticipation for the delivery of Model 3 might depress orders for Model S and Model X. While this is entirely possible, investors should consider that it's also possible that the reverse happens, with impatient customers who have placed Model 3 orders getting tired of the seemingly long wait and instead opting for Tesla's readily available models. But long-term investors should not be too concerned about these short-term headwinds and should instead focus on the long-term goal: Tesla breaking the 500k vehicles sold per year target and eventually becoming profitable.

In the final analysis, the fact that Tesla has been able to receive such a huge number of orders without significantly bumping up its ad spend is very encouraging and says a lot about the power of the brand. Analysts had earlier feared that Tesla might not be able to rely almost exclusively on buzz and the cult personality of its brand as it has in the past, and as I had pointed out in this article. Traditional auto makers are some of the biggest ad spenders in the business, and if Tesla was to follow suit then it would make it much harder for the company to become profitable. But with these fears now in the rear view mirror, this appears to be a good time to buy Tesla shares for the long haul.

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