Tesla - Up To 11

| About: Tesla, Inc. (TSLA)
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In my last article, Tesla: Profit Point, I promised a follow-up analysis of Tesla's (NASDAQ:TSLA) ramp up progress.

At the time I was nervously holding a deep long position while actively trading long and short on the money options. That worked out well - partly due to luck (no doubt), and partly due to some of the trade optimization tools I've been building (more on that later, but sign up at Tradifex if you're interested!).

Today my nerves are steady, and my short positions are closed. The reason is that, since the beginning of October, Tesla the company has been accelerating even harder than their flagship sedan. How hard is that? Well, harder than a BWM M5 for starters. But with so many major milestones in the last two months a review is in order. So let's review.


Late September bought the announcement of the Supercharger network. Three major lingering EV criticisms fell like flies.

Range Anxiety? - Worry no more about range limiting your EV enjoyment. In the time it takes to enjoy even a fairly quick lunch Tesla's charger can add around 200 miles of driving.

Electricity Costs? - Nope - Tesla's can charge using the Supercharger network for free. Limited offer period does not apply. Drive across the country and don't pay a cent for fuel of any form. You're welcome.

Indisputably clean - The endless environmental debate was rendered happily moot by Tesla's commitment to install PV on the charging stations at levels sufficient to deliver net clean energy to the grid. 'Driving on sunshine' was the phrase used at the launch - I like it.

Raised $225Mil+

Shortly after the supercharger announcement Tesla announced their intention to raise approximately $150Mil through a follow-on offering comprising an increase of approximately 5% in the shares on issue. Inches were written about the dilutive effect of this offering, desperation evidenced, and heavy discount likely. A day or so later Tesla announced the offering was closing fully subscribed at around a 1% discount to the market price... and in fact they were increasing the total allotment to increase the sum raised to $225Mil. So much for a discount, so much for desperation. Tesla's financial footing was now indisputably solid. Certain persons promised to stop writing about their frailty as a result... and then didn't.

Won Motortrend car of the year

Unanimously. And against a pretty impressive pack of contenders. And not for being electric. Enough said.

8000 hamster seal of approval

There remain a vocal rafter who scorn Tesla's battery technology as "consumer grade". Somehow these skeptics manage to ignore the fact that Toyota (NYSE:TM) and Mercedes (OTCPK:DDAIF) are sourcing Tesla drive trains for their fully electric vehicles. Yes, both companies are invested in Tesla. But both companies have exceptionally strong brands as well. Are they really likely to risk these for a stake of a few percent in a fledgling competitor?

Perhaps they're a little biased. Let's hear from Ford(NYSE:F), who have every reason to hurt Tesla, and see what they think about using 8,000 hamsters to haul a carriage.

"This, we believe, is the best battery in the entire world." - Ford electric-car chief Kevin Layden speaking to WSJ on Panasonic's battery

Well, that's... unambiguous. Fords electric car group backed their words up with action too, using the cells in Fords new c-max hybrid, a highly demanding application.

Pumped up the Volume

My core concern with Tesla in mid September was their apparent trouble ramping production. The target of 1000 units in Q3 was reduced to 500. Soon it became clear that even this was unattainable. I was fractious - was this the start of a saga of slipping schedules and spiral into insolvency? I hedged, I traded, I watched, I tweaked my model.

Then things started trending up. Feedback from those on factory visits became positive. The first bombshell was Musk's announcement near end of September that Tesla had produced 100 bodies in a week. The market didn't seem to much care, but I was encouraged. Only five weeks later Fremont's output had doubled again; 200 units/week was announced around the Q3 earnings call. Great news, because it put Tesla ahead of my target run rate and they only needed one more doubling to hit their target rate.

Of course, the another target Tesla set themselves was to produce more than 2,750 cars in 2012. With only 350 done by the end of Q3 it was hard to be optimistic, but in mid October it was announced that they had made it through the 1,000 mark. Deliveries are the integral of rate, so with rate growing exponentially deliveries really skyrocket in the closing days.

Tesla have not yet announced hitting the 400/week milestone, and they could still slip in the closing days of the year and miss by a few hundred... but at this point the difference is becoming academic. The Model S is IN high volume production... and the raved-about quality level seems to have made it through unscathed.

Battery Replacement Option

The last 'win' is what really drove me to finish up this article today. Buried near the end of Tesla's price increase announcement (of 2 - 4%) was this gem:

We have received many requests for a Battery Replacement Option. We are happy to now offer this option for all three battery variants. This option will provide you a new battery anytime after the end of the eighth year at a fixed price. Prices are as follows: $8,000 for the 40 kWh battery, $10,000 for the 60 kWh battery, and $12,000 for the 85 kWh battery.

Tesla give a battery warranty of 8 years. Bears have wrung their hands over the dire position of owners come the end of that warranty period; "Unfortunate owner left sitting in a brick on wheels staring a $40,000 replacement cost" is a popular sentiment. Well, Tesla just blew that out of the water. Worried about the battery replacement for your new ModelS 85? No worries. From 8 years in Tesla will guarantee you a new one for $12k. Pretty safe to assume that they'll be happy to do the same 8 years after that. In which time, even at today's prices, and even without using the free charging from the Supercharger network, you'll have saved another $12k on gas. For those keeping count, this is around $140 per refurbished kWh. Boom.

Tesla have turned it up to Eleven. Because they're the ones who can. And the remainder of the auto industry is going to be left scrambling to catch up. Those betting against Tesla appear to be increasingly nervous. No surprise considering the last months successes. If you want in, now's the time.

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