Tesla’s stock has spent the past week being downgraded by Wall Street analysts who cover the company.
Analysts at Morgan Stanley, Baird, and Barclays all lowered their price targets. Tesla target share prices among the analysts community are all over the map, with some banks offering bullish expectations while others think the stock will slide from its current level of about $US220.
From the outside, this might seem kind of weird. Didn’t Tesla just pull the cover off it newest vehicle, the fast and sexy Model X SUV? Isn’t the company being run by the most interesting CEO in the world?
Yes and yes, but even a groundbreaking new vehicle, complete with exotic “falcon wing” doors and 0-60 time that will probably rival some legendary sports cars, and all Elon Musk’s charisma and showmanship can’t overcome what Wall Street is pondering most urgently when it comes to Tesla.
For Tesla, the critical issue is deliveries: Can it get cars into customer hands and put money in the bank?
A history of misses
Unfortunately, Tesla now has a well-established history of missing its delivery goals. For two years running, the fourth quarter has looked iffy. Last year, Tesla projected 35,000 deliveries, but it fell short. It succeeded in building all those cars, but some deliveries slipped into the first month of 2015.
In 2015, Musk and his team projected 55,000 deliveries, but midyear adjusted that figure to a range of between 50-55,000. Once again, Tesla will need to run full out to deliver at the low end of that revised prediction: almost 17,000 vehicles before the close of the year.
The possibility of a miss on deliveries — plus other factors, mainly the high sticker price on the first examples of the Model X, well north of $US100,000 — has engendered a “been here, seen that” attitude among analysts who remember what happened last year, providing an excuse to pull back on target prices.
So why does Tesla do this: overpromise and underdeliver?
Because, at this point in the company’s history, there’s nothing to be gained from underpromising and overdelivering.
Don’t get me wrong, Tesla has wildly overdelivered on the product side. It’s cars are widely considered, by owners, observers, and the motoring media, to be incredible.
But on the business side, the story has generally been one of missed targets and delayed launches. The Model X, spectacular though it may be, was two years late. There’s certainly no guarantee that Tesla next vehicle, the mass-market Model 3, slated to arrive in 2017, will be different. In fact, a betting man might prepare himself for 2018 or 2019.
This isn’t troubling. This is good business.
The vision thing
Ultimately, Tesla is a company constructed out of a vision: change the world. Replace fossil-fuel-powered transportation with clean vehicles. You might be sceptical about this, but trust me — this is what Musk believes. This is what drives him, far more than money. (He’s already spent a fortune once and would be happy to do it again.)
Job One at Tesla is to nurture and perpetuate that vision. Musk doesn’t want Tesla to grow up to be Ferrari — he wants it to displace the Toyotas and GM’s of the world, or at least compel them to join him in transforming the way we get around.
Ferrari doesn’t need to assure anyone that it will beat expectations. The Italian supercar maker, now scheduled to launch an IPO later this month that will value the company at $US10 billion, says it will build about 7,000 beautiful cars every year, and it builds 7,000 beautiful cars every year, selling them all. In the future, it may build more. But everything would be fine for the brand if it remained where it is.
Tesla is a completely different story. You don’t change the world without expressing ambitious stretch goals. Ultimately, you don’t have much of a story without ambitious stretch goals. So Musk really has no choice but to overpromise, knowing that underdelivering is probable.
This causes plenty of volatility with the stock price, the $US100 swings over time. But anyone who understands the auto industry knows what Tesla is up against. There’s a reason why new car companies come along only every few decades. And don’t forget that Tesla isn’t just trying to be a new car company — it’s trying to be a car company that’s commercialising a technology, electric propulsion, that has never played a significant role in the history of the automobile.
No Big Failure
Tesla’s small failures, in the this context, are preferable to the Big Failure, which would of course be the company vanishing like so many car-of-the-future startups. Musk presents Tesla as being better than it is — better at technology, better at manufacturing — because that fuels the narrative. It’s analytically frustrating to see Tesla heading once again into a fourth quarter that will likely disappoint. But in the grand scheme of things, it’s a blip.
It’s a blip because to really get Tesla, you need to accept the vision and put yourself 10 or 20 years into the future. If you do that, you can imagine a world in which 500,000 Teslas hit the road every year and the global fleet of vehicles is being decisively converted from gas power to electric.
In that world, whether Tesla delivered 50,000 cars in 2015 or 48,000 is a forgotten datapoint. And whatever Tesla overpromised has been completely superseded by the vastness of its eventual overdelivery. If you accept that Tesla is on this path, then you need to prepare to be continually disappointed for the next 10 years. This is a company built on a big idea. And big ideas don’t often happen on schedule.