Tesla's Q3 Report Is Nowhere Close To As Bad As The Market Is Making It Seem

| About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) reported earnings on Tuesday that beat on both revenue and EPS, but didn't offer finite guidance until sporadic guidance on the conference call.

CNBC.com reported:

Tesla Motors delivered quarterly earnings and revenue that surpassed analysts' expectations on Tuesday.

The company said it finished the quarter with a record of slightly over 5,500 deliveries, including more than 1,000 deliveries to European customers. Some analysts were looking for a higher number.

For the current quarter, Tesla said it plans to deliver close to 6,000 Model S vehicles.

Tesla reported a net loss of $38.5 million, or 32 cents per share, an improvement from a loss of $110.8 million, or $1.05 per share in the year-ago earlier period.

The company posted third-quarter earnings excluding items of 12 cents per share, up from a loss of 92 cents a share in the year-earlier period.

Revenue increased to $603 million from $50 million a year ago.

So, that covers Q3 - it was a beat across the board, though not the blowout that I was expecting. Still, extremely impressive.

While the earnings may have come in as a disappointment to momentum players (who desperately needed bullish guidance to continue the stock's run with its valuation), long term bulls on Tesla should see the call and Q3 as enormous moves in the right direction.

For a brand new company that's building something from the ground up, these are extremely quick results that are extremely promising. These are the type of results and speed that got Tesla to the valuation it's at today. However, the stock's valuation clearly got caught up in the excitement, and now we're seeing what I think will be a short term correction in the face of not having bullish guidance going forward.

Alright, first things first. I need to address a few items that I got wrong yesterday in my article regarding VIN data, and also a couple things that I got right. In addition to that, we'll review what Tesla reported, what I thought was most important from the call, and why I'm still bullish long term on Tesla.

Yesterday, Paulo Santos wrote a an awesome article, talking about VIN number counting to keep track of how many vehicles Tesla has sold over the course of a period. He pointed out the fine work of a guy named Craig Froehle, who took to the process of monitoring VIN numbers to perform an analysis that could offer a relatively accurate snapshot into Tesla's production. Then, Paulo drew conclusions about U.S. demand of Tesla's vehicles declining in correlation with the VIN number scattergram.

Let me show you what I concluded from that same set of data, then we'll review Tesla's earnings and revisit what I got right, wrong, and everything in between.

This is from my article, "VIN Data Shows a Tesla Q3 Blowout Coming":

I'm going to conclude by what, if this data set holds up to be relatively accurate, we should know about Tesla's upcoming earnings today:

1. Based on the company's 2 month rolling VIN # average, Tesla could report up to 8,000 vehicles sold for the third quarter. If the previous month was higher, possibly more.

2. Even with a large margin of error (cars being used for promotional purposes/testing/etc), Q3 is likely to smash estimates (with high estimates coming in yesterday at almost 6,000).

And, while it seems that guidance for Q4 might suggest a bit of a slowdown (~5000 vehicles/quarter), Paulo's "slowing down" thesis doesn't take into account:

1. Any type of plant malfunction or variable that could have slowed down VIN production, but not reduced demand or backlog.

2. The government shutdown, which was likely (at least for companies like Ford) to push October sales forward into November.

3. The upcoming Holiday season, where sales in all sectors generally come in above estimates during the year.

What I Got Wrong: I admit that I was off base in my estimate for 8,000 potential vehicles for Q3, which was on the extremely high end of what I thought was possible (hence the term blowout). Tesla did report more than what was originally estimated for this Q, which was 5,000, but only roughly 10% more. By yesterday, estimates had glided up towards 5,500-6,000 to begin with.

What I Got Right: The fact that VIN numbers tailing off a bit in the U.S. was not indicative of demand declining. As Musk said on the conference call, not only does U.S. demand continue to increase, but Europe demand put pressure on being able to move U.S. product. So, Paulo's guess that demand has declined isn't correct - it's simply moved overseas, and has looked like it hasn't been there due to production constraints. The backlog increases, which will no doubt prove to be bullish for Tesla's future; as long as they don't make people wait so long for a vehicle that they become disinterested.

Relief on the company's main constraint, the battery cells that were the main topic of the call, should be coming in 2014 according to Tesla. It was announced just yesterday that Tesla had contracted Panasonic (OTCPK:PCRFY) for a deal for 2 billion battery cells:

Panasonic has agreed to supply nearly 2 billion cells over the course of four years. How does that big number break down in term of EVs?

"With the largest Tesla pack using around 7000 cells, the quantity involved is enough for close to 300,000 vehicles. Given that sales will grow over time, it seems likely Tesla is preparing to reach 100,000+ vehicles sold in the final year of the agreement - five times the 2013 total."

Elon Musk is doing things the right way through production constraints, instead of overspending to accommodate demand that may or may not be a constant. Musk alluded several times that the company - at this stage in its growth - is going to keep production capability as close to demand as necessary. While he noted that he wanted to rope spending in as much as possible, he made a point several times to say that he doesn't want to create an unhappy customer by making them wait too long. He cited the company's unique structure where the customer is shipped their car and their car only.

Musk stated that he believes Tesla will remain competitive, because buying their $75k vehicle amounts to buying a gas powered vehicle in the U.S. for just $28 thousand. He said that leasing is likely to be the preferred path for electric cars going forward - and that it would show immediate yield for consumers in terms of savings and avoiding maintenance.

So, as I stated above, the long-term Tesla bulls have a ton to look forward to here:

1. Increasing demand in the U.S. in Europe

2. Continued guidance for 21,000 vehicles shipped this year.

3. Addressing of the company's production constraints through Panasonic deal and an eventual "giga factory".

4. Continued dabbling into other overseas markets, like China.

5. Tesla continuing to spearhead the luxury electric automobile segment of the automobile industry.

I'll likely be buying on the dip tomorrow, as I feel that even if Tesla doesn't deserve it's current valuation, it will at some point relatively soon meet, and exceed it.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.