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Summary

  • Tesla's Fremont production line is shut down for Model X production upgrades.
  • Tesla is a momentum stock, and predictable news of higher Model S production following the shutdown/upgrade is likely to boost shares.
  • But the upgrade will give Tesla new capabilities, beyond greater capacity, and Tesla may surprise us with some things new and things different before Model X arrives.

Tesla (NASDAQ:TSLA) is a wildly volatile stock that has shown enormous growth in value even as the company has delivered at best modest profits. The reason Tesla shares outpace company profitability is, of course, that Tesla is growing rapidly and to many seems poised to disrupt the auto industry and possibly the oil business, too. But there are also a good many investors who see Tesla as little more than a snake-oil vendor, surviving on government mandates and subsidies, and producing expensive toys for the climate-change-believing, green-thinking, tree-hugging, well-heeled, liberal elite.

With such a degree of polarization among investors, combined with a fairy-tale growth and technology story, is it any wonder this stock responds to the latest news about the company, the environment, or almost anything? A year and a half ago, Tesla shares soared when it was announced they had made a quarterly profit on both a GAAP and a non-GAAP basis, even though this profitability was obviously the result of extra ordinary items, and not fundamental profitability of Tesla's car manufacturing operations. Only days later, when Tesla announced they had arranged an innovative financing facility that would support continued high volume sales of Model S to a broader, less well-heeled customer base, their stock actually tanked.

The market for Tesla shares responds positively to things that are simple for investors to understand. The market is uncomfortable with things that are more arcane, and sometimes punishes the stock even if the arcane news is favorable. For Tesla investors, it may be more useful to look ahead to what interesting, sound-byte news is likely to be forthcoming than to analyze in detail Tesla's financials and sales projections.

This brings us to the shutdown of Tesla's Model S production line, the upgrades being put in, and what this may mean for the stock. The market has already heard a lot about the Model X. There is a five-digit number of backlogged orders, supposedly. It is all but certain that every well-heeled soccer-mom in the universe will want a Model X just for those erotically articulated Falcon-Wing doors. And there is the certain view held by some that Model S sales now hobbled by production constraints will take off, making Tesla shares soar, even before the Model X arrives next year. But these things are known (if not necessarily believed) by the market already.

What may be more useful to investors in this highly volatile momentum stock are possible surprises Tesla may spring on an unsuspecting market. From past experience remember, it tends to be the simple, easily understood news that moves Tesla shares. This means that even relatively trivial "surprises" coming out of the Tesla production line upgrades may have outsized impact. So, here are some of the "surprises" the market is likely to encounter between the time Tesla production resumes and Model X finally arrives.

Safety Improvement/Cost Reduction

Expect an announcement of "improved" battery protection features.

Not long ago Tesla began installing add-on parts, including a titanium shield, to enhance battery protection from road debris. It would make sense at some point for Tesla to incorporate these additional battery protection features into the basic car design and during a production line upgrade would be a good time. I'm thinking Tesla will be unable to contain this good news and another set of looping videos showing cement blocks and trailer hitches bouncing off the bottoms of "improved" Teslas is all but certain.

2015 Model S Face-lift

Expect minor re-sculpting to Model S body work, enhanced features for the "2015" model.

Model S has been cited for not having some features available, or even standard on competing luxury cars. We are likely to see Tesla add features such as adaptive cruise control, LED headlights, improved seats, etc. Some minor modifications to front/rear fascia will be necessary to accommodate changes to lighting, adaptive cruise control, and enhanced battery protection. If the fascia molds are to be changed, Tesla stylists may be tempted to make other minor tweaks to better tie Model S with the developing Model X design.

2015 Model S Range Improvement

Expect a modest range and battery capacity increase.

Tesla has introduced tire/wheel "packages" and the S85P+ since Model S was first delivered. Along the way, Tesla achieved some modest range improvements. At the same time, small improvements to battery capacity have probably been achieved at Panasonic (OTCPK:PCRFY) by tightening control of their manufacturing process. Some or all of the Model S suspension/tire upgrades could be moved to the "standard" configuration, streamlining production, and increasing range. At the cost of "re-certifying" against the EPA mileage test, Tesla could then increase their EPA range number. They could also re-rate the battery to take advantage of any Panasonic process improvements. We could see something like the S85 becoming the S90, and the EPA range going from 265 miles to 290 or so.

2015 Model S All-Wheel Drive

Expect a Model S with all-wheel drive and spectacular acceleration.

One of the certain upgrades to Tesla's production will be tooling to install the front drive motor/gearbox for the AWD Model X. It would make sense for Tesla to "try out" both the AWD configuration and the associated manufacturing on Model S (which is built on the same platform) before going into full Model X production. The most "exciting" aspect of an AWD Model S will be the 0-60 time of a performance version -- I calculated 3.2 seconds.

Surprises won't all be good ones.

Expect some bad surprises that punish Tesla shares.

Tesla is significantly revamping their manufacturing line to increase the rate of production. And Tesla is adding features to their manufacturing process for AWD and other things needed for Model X. It is unrealistic to assume all of this will be done without a glitch or two. When the market hears about likely teething problems with the upgraded line, expect that Tesla shares will be punished.

Conclusion

To sum things up, Tesla has shutdown production so they can upgrade their line. The market expects to see higher Model S production from the upgraded line in the last half of 2014 and Model X cars in 2015. Looking closely at the kinds of line upgrades Tesla is likely to be making, I surmise that there will be currently unanticipated news, both good and bad, resulting from this upgrade that will impact the price of this volatile, momentum stock. Tesla investors should get some rest and pay attention because the road ahead may be bumpier than many think.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in TSLA over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Tesla, Are We About To Be Surprised?