Posted on June 29, 2018 by Matt Pressman
Wall Street is obsessed with Tesla Model 3 production numbers. To some degree, this is understandable. But, according to one disruptive Wall Street Analyst, Tesla's production numbers don't accurately reflect the bigger picture for Elon Musk.
Above: Tesla's Model 3 (Image: Tesla)
When you pull back the lens a bit, it appears the vast majority of those covering Tesla [NASDAQ: TSLA] on Wall Street are missing the forest for the trees. Pierre Ferragu, at New Street Research, explains (via Markets Insider), "You have this army of analysts today who are speculating about whether Tesla [is] producing 500 or 700 cars per day today, but honestly who cares?"
Ferragu elaborates, "The production rate is increasing. If they are at 500, they're going to get to 10,000 [per week] maybe at the end of next year. And if they are at 700, maybe [they] are going to get to 10,000 in the middle of next year. But on the enterprise value [for] Tesla, whether they are at 10,000 [per week] now or in six months, what is the difference on valuation? It's nothing."
Perhaps CEO Elon Musk is playing the long game. Ferragu argues, "You have to move on and look at what matters... [Elon Musk] tells the company and he tells the public: 'We are going to ramp Model 3 in nine months.' He actually knows that the probability they fail is very high, but he wants everybody to shoot for that."
Above: Tesla's CEO Elon Musk (Instagram: thaddeus_ces)
Analysts (mistakenly) take Musk's word at face value. Ferragu contends, "Sell-side analysts who don't know the guy, who don't understand the technology, who don't understand what it is like to work at Tesla — they translate his 'shot for the moon' as 'they missed it.' Instead of translating it as 'they started,' they translate that into 'they failed,' which is a massive mistake. It's just a wrong way of translating Elon Musk."
An over-obsession with production stats could prove myopic. Other factors might foreshadow the future more accurately — e.g. Tesla's competitive advantage, market share Tesla steals from legacy automakers, and how those companies respond." Ferragu says, "For all these questions there is no research. That's where I can make a difference."
So should analysts ignore production numbers altogether? Not necessarily. Ferragu tells The Street, "a near-term cash crunch could prove to be a problem." However, "You should not look at how many cars are produced. Instead you should look at how much money each vehicle is bringing in, and as Tesla ramps production their free cash flow will improve dramatically."
Above: An overview of Tesla (Infographic: The Street)*
At this stage, Tesla is a boutique automaker with only three cars in production. However, plans are underway for more vehicles (see The Street's infographic above) and significant growth lies ahead. Ferragu concludes, "The long-term, five- to seven-year trajectory is the real story of Tesla... Tesla has the potential to gain a lot of share in the premium market. It has the potential to become BMW."
Source: Markets Insider; The Street; *Editor's Note: Regarding the infographic — to be precise, Tesla was actually the first American car company to make an IPO since Ford went public in 1956. In addition, here are much more accurate design renderings/images shown for the Model Y and Tesla Semi.