Tesla Motors Earnings: Continuing to Impress

Tesla Motors (NAS: TSLA) reported its third-quarter earnings on Monday. While the Silicon Valley-based electric carmaker posted a loss of $110 million, or $0.92 a share excluding certain items, that was no surprise -- it met the average of analysts' estimates in a Bloombergsurvey.

For the most part, the news from Tesla continued to be quite positive, as the upstart carmaker made impressive progress on its plan during the quarter. But despite Tesla's nearly flawless execution to date, a couple of big challenges remain.

Early reviews on the Model S are strongly positive
The big story at Tesla right now is the continued ramp-up of production of its Model S sedan. The Model S's debut has gone extremely well so far: While early efforts to increase production hit some (entirely predictable and routine) snags, CEO Elon Musk said on Monday that Tesla's production line was building 100 cars a week by the end of the third quarter.

Musk noted that that rate has since doubled -- Tesla is now building more than 200 cars a week (or 10,000 a year). That's a critical point, one at which the company starts to generate positive operating cash flow, he said. Production is expected to double again "within four to five weeks" to the company's target production rate of 400 a week, or 20,000 a year.

This ramp-up has been all the more impressive because the cars themselves are getting mostly rave reviews. While one or two reviews of very early examples did report some small quality issues -- Edmunds complained about squeaks in the interior and misaligned body panels, two areas that have bedeviled lots of other small-volume carmakers -- professional reviewers (including Edmunds) have been deeply impressed by the car for the most part.

Those impressions have already started turning into accolades. Tesla's website proudly trumpets the Model S's selection as Automobile magazine's 2013 Automobile of the Year, the first of what could end up being a series of big-league awards for the sleek sedan. Those accolades have helped keep the orders coming in: Tesla said on Monday that while it has had some cancellations, net "reservations" for the Model S increased to 13,200 at the end of the third quarter from 11,500 three months prior.

Taking steps to reassure mainstream buyers
All of this bodes well for Tesla as it moves toward the next phase of its business. For some time, I have argued that one of the two biggest challenges remaining for Tesla will be to "cross the chasm": to keep finding enough new customers to keep assembly lines humming once the 10,000 or so early-adopter types in its fan base have received their cars.

Building a car that gets great reviews has already taken Tesla a long way toward that goal, but another key to that success will be to convince mainstream buyers that an electric car is just as usable on an everyday basis as a gas-powered one. To that end, Tesla has been talking up its new "Supercharger" network of high-speed chargers that it is placing in rest stops around the country.

The "Superchargers" are high-speed charging stations, developed by Tesla, which can add 165 miles of range in 30 minutes of charging to a Model S with the top-level 85-kWh battery pack. Musk said in a statement on Monday that by the end of 2013, Tesla will have installed these charging stations in high-traffic corridors around the country, enabling "fast, free, purely electric travel from Vancouver to San Diego, Miami to Montreal and Los Angeles to New York."

"Past the point of high risk"... at least until the competition arrives
Musk said on Monday that "Tesla is really past the point of high risk." His point was that the Model S's production ramp-up has gone according to plan, but I'd argue that it's not necessarily true: As I said, Tesla still has two big challenges: to keep finding buyers for its cars, and -- critically -- to prove that it can compete once the world's big-league automakers take aim at its segment.

This may be an under-appreciated risk of Tesla's stock as a long-term investment. Tesla's battery technology, based on laptop-type lithium-ion cells supplied by partner Panasonic (NYS: PC) , is terrific, and by partnering withToyota (NYS: TM) the company may have (at least to some extent) pre-empted competition from the world's green-car leader.

But if the likes of Nissan (NASDAQOTH: NSANY.PK) or Ford (NYS: F) or General Motors (NYS: GM) or Volkswagen (NASDAQOTH: VLKAY.PK) decide to leverage their R&D advantages and vast economies of scale to build cars that compete directly with the Model S, that will be a huge challenge for Tesla.

And make no mistake: If the Model S continues to look like a big success, there will be big-league competition -- and soon.

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.

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Fool contributor John Rosevear owns shares of Ford and General Motors. 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, General Motors, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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