On yesterday’s second-quarter earnings call, Tesla Motors executives made bold predictions for the company’s energy storage business, while also tempering their outlook on electric-vehicle sales.
Facing production challenges with the Model X -- on track to start deliveries by the end of September -- Tesla stepped down its overall sales target for 2015 from 55,000 to between 50,000 and 55,000, according to the investor note.
Tesla stock consequently fell by more than 5 percent, from $270 at market close to $255 in after-hours trading Wednesday night. Shares hovered around $245 on Thursday morning.
“We do think that it’s going to be quite a challenging production ramp on the [Model] X and…we only want to deliver great cars,” said Tesla CEO Elon Musk. “We don’t want to drive to a number that’s greater than our ability to deliver high-quality vehicles.”
Musk said there have been some technical difficulties building the high-end electric SUV, specifically with the second-row seat, which he said was a “sculptural work of art, but a tricky thing to get right.” He added that Tesla can only move as fast as its “slowest and least lucky” supplier.
Because the S and the X are made on the same assembly line, issues with the X could slow production of the S, the shareholder letter noted.
Given these challenges, Tesla scaled down its production targets for 2016 from an average of 2,000 units per week, to between 1,600 and 1,800 units per week. The production figures will be split roughly in half between the Model S and the Model X, although there may be a near-term preference for the Model X to make up for delays.
“The main thing is that we don’t want to set high expectations and then the only way for us to feel good about the future is if we exceed really high expectations,” said Musk. “Winning needs to feel like winning, if that makes sense. That's why we’re setting those numbers. Could we do 2,000 aspirationally? Yes. Do we want to commit to that? Ideally not.”
A possible capital raise?
While setting lower expectations for the near term, Musk stood behind his projection that the company would be able to produce 500,000 cars in 2020. Once it gets to that point, Musk said it will make sense to think about localizing production in different markets, with the possibility of opening factories in Europe and Asia.
Tesla’s production capabilities are steadily improving. The electric-car manufacturer produced a record 12,807 vehicles last quarter, and achieved record quarterly deliveries of 11,532 vehicles. Deepak Ahuja, Tesla’s chief financial officer, who plans to retire this year, said the company is currently on track to be cash flow positive by early 2016.
Tesla reported $1.2 billion in revenue in Q2, up from $857.5 million a year ago. Analysts had expected Tesla to earn about $1.18 billion.
Tesla ended the quarter with $1.15 billion in cash and cash equivalents, having spent $359 million. Most of the money went toward capacity expansion at the Fremont plant to accommodate Model X manufacturing, as well as construction of the battery Gigafactory in Nevada.
To fund continued growth, Tesla closed a $500 million asset-based credit line last quarter that can be expanded to $750 million. So far the company has drawn down $50 million from that pool.
Bank of America Merrill Lynch analyst John Murphy asked if the executives would also consider raising capital in the next 12 to 18 months instead of relying on the credit line. Musk indicated it was possible, saying he was in "the same mind frame" as Murphy.
“There’s not a need to raise equity capital; there may be some value in doing so as a risk-reduction measure,” he said. “But to be clear…even in the absence of any additional capital-generation activity, we would have on the order of $1 billion through the end of the year.”
When pressed for more detail on a possible equity raise, Musk refused to comment.
Battery demand at "a nutty level”
Tesla has a lot of things to spend money on in the coming months. In addition to starting deliveries of the Model X next month, Tesla plans to roll out autopilot features before the end of the year, reveal the Model 3 design in Q1 2016, and start the first Model 3 deliveries in late 2017.
At the same time, Tesla continues to retool the Model S. In July, the company introduced a new 90-kilowatt-hour pack option that increases the range of 85D model by 6 percent. Tesla also launched “Ludicrous” mode, an upgrade that improves the 0 to 60 mile-per-hour acceleration on the P85D from 3.1 seconds to just 2.8 seconds.
Tesla is also experimenting with a customer referral program that will help inform where and how many stores the car company should build. Tesla also launched a preowned vehicle program last quarter that has already generated $20 million in revenue from the resale of trade-in vehicles.
While these activities are key to expanding Tesla’s existing business, perhaps the most exciting opportunity for growth is in the new energy storage business.
Assuming that orders translate into sales, Tesla has already sold out of all the batteries it could possibly make through the end of next year, Musk said on yesterday’s call.
These sales represent $40 million to $50 million in the fourth quarter of 2015, and could be 10 times that amount by the end of next year, according to the executive.
“That growth rate is probably going to keep going at quite a nutty level; it’s probably at least a few billion dollars in 2017,” he said. “It’s somewhat speculative at this point, but I think that’s likely.”
Tesla has already taken more than 100,000 reservations for more than $1 billion worth of its batteries. “And that’s with no marketing, no advertising, no sales force to speak of -- it’s basically a presentation, a webcast and three minutes of press Q&A. So there’s probably room to improve,” Musk said.
Gigafactory capacity higher than expected
The majority of battery orders, around 70 percent, have been of the Powerpack, Tesla’s 100-kilowatt-hour units priced at $25,000 each, or $250 per kilowatt-hour. Tesla’s largest single order to date was for 250 of these batteries.
Sales of the Powerwall, Tesla’s sleek residential battery designed for load-shifting, backup power, and storing solar energy, have been doing better than expected, according to CTO JB Straubel. But the company still expects the larger systems to make up the bulk of its orders well into the future.
In June, Straubel and Musk gave a keynote address at the Edison Electric Institute’s annual conference highlighting the compatibility of their products with the utility industry. On yesterday’s call, Musk debunked the notion that Tesla Energy is all about supporting renewables. While the company executives are huge believers in renewable energy, it isn’t the biggest opportunity for batteries.
“There’s always a cost advantage to the system-wide implementation of stationary storage, because of the high peak to trough electricity usage,” said Musk. “If you have buffering, which is what stationary storage allows for, then you only need your power plants to operate at the average energy usage, which means you can basically, in principal, shut down half of the world's power plants with energy storage. This is independent of renewable energy.”
Tesla’s greatest strength in the energy storage market is its ability to provide a turnkey solution at low cost, said Straubel. But he refused to reveal how much of a premium Tesla charges for applications beyond the batteries themselves, such as installation and grid-integration software.
While reiterating that he was being highly speculative, Musk said the battery business expects to see gross margins on the order of 15 percent in the early days, rising up to 30 percent in the medium term depending on market trends.
The Gigafactory is central to Tesla’s energy storage strategy. The $5 billion facility under construction in Nevada is designed to produce 50 gigawatt-hours of energy storage each year by 2020, or enough batteries for 500,000 Tesla vehicles.
Straubel said battery module and pack construction at the Gigafactory are on track for the first quarter of 2016. As construction has progressed, they’ve been able to improve the efficiency of the space, which could potentially allow for significantly more output, he added.
“Our plans are still on track and unchanged for the first phases of production to support the Model 3 and Tesla energy production,” said Straubel. “But the capability of the site...could go much higher than we initially thought it could.”