Last quarter, Tesla Motors said its "primary focus" currently is to expand "production to meet worldwide demand." The company reports third-quarter results today after market close and we'll find out just how much its production rate has improved.
Tesla Fremont factory. Source: Tesla.
It makes sense that expanding production would be Tesla's primary goal. As it stands, it is supply limited, selling every car it makes. Notably, however, Tesla is able to make deliveries in as little as four weeks according to a recent update on Tesla's Facebook page.
But that's not entirely a true representation of how quickly Tesla is able to meet total demand. For instance, global customers can't make an order until the company begins accepting orders in their country. So, Tesla's global demand is somewhat uncertain. The best guess we have on the global demand (including the U.S.) for Model S is an annualized rate of deliveries of more than 40,000 -- a number Tesla said it believes it can reach by late 2014.
Even more, when Telsa arrives in a particular region, word of mouth tends to spark even more orders. "Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries, which means that customers are selling other customers on the car," Tesla said in its first-quarter letter to shareholders.
One concrete instance in international expansion has already proven this viral word-of-mouth marketing to be true. In Tesla's second-quarter letter to shareholders, Tesla said it expects "to deliver almost 800 vehicles [in Norway] this year based on current orders." But as I've pointed out in a previous article, Norwegian car sales data suggests that Tesla sold 616 Model S sedans in September alone.
Meanwhile, however, production bottlenecks persist. In Tesla's second-quarter earnings call, management explained:
So that's where we are really spending our time line, is clearing up those production bottlenecks or supply chain bottlenecks. I think we should have probably cleared most of the amount in the next six months ... we are striving to become demand limited as opposed to production limited.
For the most part, Tesla seemed to suggest that only very little production rate improvements may be made in the third quarter. The only time an expected improvement for the third quarter was mentioned in the company's second-quarter letter to shareholders, management sounded conservative; though it said it expects "production to increase," it only gave guidance for "slightly over 5,000 Model S vehicles in Q3," despite the fact that "a considerable number of vehicles produced during the quarter will be in transit to European markets at the end of Q3."
Tesla managed to increase weekly production by 25% in Q2 from 400 to 500 vehicles per week. Could Tesla dramatically improve its production rate in the third quarter again? A little more than halfway through the quarter, CEO Elon Musk told CNBC that the company had reached a rate of more than 500 vehicles per week. Could Tesla have reached an average weekly production rate of 550 vehicles for Q3? If it did, it should have no problem meaningfully outperforming its own guidance for "slightly over" 5,000 vehicles.
Does it matter?
Absolutely. Tesla's results are almost entirely dependent on its production rate. On the other hand, however, this is just one of many quarters. Given its borderline euphoric valuation, the company is going to need to do a lot more in the next few years than slightly boost its production rate to live up to expectations. But that shouldn't stop investors from keeping tabs on the progress of one of its most important growth drivers.
Tesla will likely give us an update on the important metric today when it unveils its third-quarter letter to shareholders. Even more, we may get further clarification in its third-quarter earnings call.
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The article Has Tesla Reached a Weekly Vehicle Production Rate of 550 Units? originally appeared on Fool.com.
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