Tesla's Losses Grow, but That's OK

Upstart Silicon Valley automaker Tesla Motors (NAS: TSLA) released its second-quarter earnings report late on Wednesday, and it contained few surprises for seasoned Tesla-watchers.

The company's loss of $0.89 a share beat consensus estimates by a bit, but its 54% year-over-year revenue drop wasn't unexpected. With the end of production of its outgoing model, and the company's new car just beginning to roll out of Tesla's California factory at the very end of the quarter, costs were naturally up and revenue was bound to compare unfavorably to year-ago figures, just as it did last quarter.

All that was expected, and none of it should concern shareholders. But the real test for Tesla will be coming soon.

Showtime for Tesla is just beginning
The key event of the second quarter was arguably the biggest moment in Tesla's short history: The first production examples of the long-awaited Model S sedan, Tesla's second model and the first one it has produced entirely on its own, rolled out of Tesla's factory and into the eager hands of their new owners.

Production started very slowly in June, with just one car per day coming off of Tesla's assembly line, as the company worked to fine-tune its processes and the cars themselves to ensure that they delivered the highest possible quality to early customers. Tesla has since doubled that pace, and is expected to gradually ramp up to about 80 cars a day by the end of the year. CEO Elon Musk confirmed on Wednesday that the company is on track to produce 5,000 examples of the Model S this year.

Tesla held an event for the automotive media in June in which selected reporters were allowed a 10-minute drive in a Model S. Early first-impression reviews were mostly quite positive, with drivers praising the car's spaciousness, acceleration, and composed handling. There were a few niggles, though -- Edmunds' review called out the quality of the car's interior materials as "unlikely to worry Audi" and expressed concerns over squeaks from the dashboard fascia on bumpy roads.

Small problems that could become big issues for Tesla
Those sorts of things are exactly the kind of problem that has historically bedeviled small specialist automakers. Modern cars' dashboards are extremely complicated assemblies, and getting them right is quite a feat even with the huge budgets and experienced engineering teams that a company like Toyota (NYS: TM) or Ford (NYS: F) can bring to the table. As Tesla ramps up to take the Model S beyond its early adopters and out to do battle with impeccably executed mainstream luxury brands like Audi and BMW, complaints about interior materials and squeaks should be taken very seriously, as these are the sorts of things that turn off fussy buyers.

The good news is that Tesla has already shown a remarkable ability to improve the Model S on the fly. Unusually for an automaker, Tesla makes a huge percentage of the Model S's parts and subassemblies right in-house, and has demonstrated that it is willing and able to modify, fine-tune, and re-engineer bits and pieces quickly.

Tesla said on Wednesday that it is already evaluating enhancements to the Model S's center console in response to early customer feedback, so answers to at least some of Edmunds' concerns may already be in the works. It's hard to fault the company's apparent responsiveness and willingness to improve.

Looking ahead: Still on track
Musk reaffirmed Tesla's prior guidance on Wednesday, saying that the company expects between $550 million and $600 million of revenue for the full year -- much of that to come late in the year when Model S deliveries start to accelerate. Tesla expects to produce just 500 or so cars in the third quarter; but, as noted above, Musk confirmed that the company remains on track to deliver 5,000 examples of the Model S by year end.

That will leave a lot of names on the waiting list, of course. Musk said that the company now has over 12,000 "reservations" for the Model S -- and the pace of orders has picked up since the first reviews of the car were published in late June. He said that he is "confident that demand will surpass 20,000 Model S units for full year 2013 deliveries," and reaffirmed that Tesla is targeting a 25% gross margin for next year.

Tesla's execution remains impressive, but its long-term prospects remain cloudy. How will the company preserve its margins once better-funded competitors take aim at its niche? Even as I admire Tesla's achievements to date, I'm not high on its chances of long-term success. But while Tesla Motors is a recommendation of the Fool's Rule Breakers newsletter service, there's a different multibagger that has the growth-stock service's attention these days. Find out what that stock is with a free report.

The article Tesla's Losses Grow, but That's OK originally appeared on Fool.com.

Fool contributor John Rosevear owns shares of Ford. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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