Could Tesla Motors (NASDAQ: TSLA) Miss This Quarter’s Expectations

Companies that boast innovation and disrupt markets are without a doubt tempting investments, but are usually enthusiastically overpriced. The idea of a company taking over a growing industry attracts many investors that are eager to bid up the price of these companies. The saying “buy when everyone is selling and sell when everyone is buying” allows investors to avoid these securities. Tesla Motors (NASDAQ: TSLA) is obviously one of those companies that are priced with too much enthusiasm, and should not be invested in at these levels.

Quarterly Results

Last week the company released its quarterly earnings report for the second quarter of 2014. The company posted positive earnings and thus gapped upwards. However, even though the report was positive, the company still faces many challenges in its goal to meet the expectations forecasted by the company’s management.

Earlier this year, Tesla expected to produce 35,000 units of Model S electric vehicles by the end of this year. Now, the company has lowered its third quarter guidance to 7,800 Model S vehicles. The company states that the cut back on vehicles to be produced is due to the stoppage of production at its factory in order to complete the factory upgrade.

Previously, in order to meet its 35,000 end year goal, Tesla would have to reach 9,500 vehicles in the third quarter. However, before the third quarter estimate was announced, the company’s management board decided that it was necessary to temporarily halt production and prep the factory for the production of the Model X, Tesla’s new SUV electric vehicle.

Therefore, it seems that Tesla’s excuse for lowering its third quarter expectations are groundless.

Overly Optimistic Production Forecast

Tesla has produced 14,036 units of electric vehicles in the first two quarters of 2014. Add that figure to the third quarter guidance of 7,800, then that means that the company will need to produce about 13,100 electric vehicles in the fourth quarter in order to achieve its full end of year estimates. This means that the company will need to nearly double its third quarter production, which seems like an overly optimistic estimation.

Additionally, Tesla plans to deliver 100,000 vehicles by the end of 2015. Elon Musk, the founder and CEO of Tesla Motors, raised doubts about Tesla’s ability to meet that prediction by stating that the company’s annual production rate should grow beyond 100,000 units by the end of 2014 if the company executes according to plan and no serious macroeconomic shocks occur.

Since Musk is saying that it will meet its estimates if there are no obstacles, it is unlikely that Tesla will reach that figure with no setbacks, considering the constraints of the factory issues.

Risks For Expanding In China

In order to meet that 100,000 forecast for next year, Tesla is depending on the Chinese demand for its electric vehicles growing tremendously. However, a few challenges in China already are leading investors to doubt Tesla’s success.

The first comes from Chinese laws. The Chinese government provides consumers with a 10% tax relief for electric vehicles. However, this tax avoidance doesn’t apply to imports, which is the disadvantage that Tesla faces against domestic electric vehicle companies.

Secondly, the charging stations in China are not compatible with Tesla vehicles. When asked to speak more about this issue, Musk swept the risks about incompatibility under the table. However, this is a very significant risk.

Third, there are fewer infrastructures set up for providing service to customers in China, and Tesla could be slapped with dissatisfied customers, which would drag down demand.

The Model X

The release of the highly anticipated Model X is delayed again. Musk pushed the date for the vehicle’s unveiling to at least the second quarter of 2015.

Additionally, on the road testing for the Model X will not begin until the first quarter of the same year. This means that in order for the car to be released during the second quarter, the car will have to test perfectly during that time. There is a high chance of a fault being discovered during the testing phase, and delaying the release of the vehicle even further.

The Gigafactory

According to sources, Musk will confirm a location for the Gigafactory within the next few months. The gigafactory is planned to be open and running by 2017, and produce more lithium ion batteries in one year than the entire world has made in 2013.

Musk has already signed on Panasonic (OTCPK: PCRFY) as its partner. Paansonic will provide about 30% of the total $4 to $5 billion funds to get the gigafactory off the ground and running

In order to make the 2017 deadline, Tesla has already started work at multiple different potential locations for the gigafactory. The company plans to focus on building construction quickly once the final location is confirmed and announced. This move shows just how tight Tesla’s deadline is.

Also, state legislators are notoriously slow at approving and signing bills, making is difficult for Tesla to get the legal documents to even start building a structure. Thus, supply chain constraints seem to be a very possible future for the electric car company.

Conclusion

Tesla is without a doubt an incredible business, in terms of impact on the world and impact on the market. However, Tesla is absolutely terrible as an investment at current trading levels. Meeting its short term and long term guidance figures are extremely difficult and unlikely. Lowered third quarter production, challenges in its expansion into China, delays of its Model X vehicle, and delayed Gigafactory are all obstacles that will likely bring Tesla down.