Volume Production Is Key to Tesla (TSLA) Success: Analyst

Tesla, Inc. (TSLA) delivered record vehicles this past quarter despite a chip shortage and supply chain bottlenecks. But analysts are already looking past its recent numbers to forecast future performance.

Production Capacity Is Key to Tesla's Success 

In a note out over the weekend, Wedbush analyst Dan Ives wrote that Tesla's production capacity remains key to its success. "While the chip shortage has been a clear headwind for Tesla and the overall auto/tech industry, we believe building out manufacturing capacity globally remains a key to Musk & Co. success in 2022 and beyond," he wrote.

Tesla has manufacturing facilities in three locations globally—Fremont, California; Austin, Texas; and Shanghai—and it plans to start production at a fourth facility in Berlin by November or December 2021, according to the company's CEO Elon Musk. "Starting production is kind of the easy part. The hard part is reaching volume production," he said. That production figure refers to 5,000 or "hopefully 10,000" vehicles.

When it was a low-volume car producer, Tesla had relatively fewer problems in manufacturing. But its ramp-up to volume production with the Model 3—the company's first electric vehicle aimed at the masses—exposed it to "production hell," in Musk's words.

That hell translated to instances of the company shipping defective products from its factories. Customers complained about the build quality for Tesla cars, which had problems ranging from water leakage to inferior paint quality. "So, prototypes are, relatively speaking, easy and fun, but reaching volume production with reliable parts and at an affordable price is excruciatingly difficult," Musk told vehicle engineering consultant Sandy Munro earlier this year.

But the company seems to have learned its lessons well. While the chip shortage hampered production at other automotive manufacturers, Tesla crafted innovative solutions to supply chain problems and re-engineered its software to counter chip shortages. When other car companies were reporting a dip in their deliveries, Tesla had doubled the number of cars it delivered to customers.

Wedbush's Ives wrote that the coming online of Austin and Berlin factories to expand Tesla capacity in 2022 was a "major positive" for the company. Currently, Tesla's customers in Europe are served by its Shanghai Gigafactory. Production from its Berlin facility could boost sales in the region. Ives has estimated a delivery figure of 1.5 million vehicles in 2022 for the car company. The consensus estimate at Wall Street is 1.3 million units. Ives is a Tesla bull with a $1,000 price target for its stock.

At the company's recent annual shareholder meeting, CEO Musk said the company was planning to make its Model Y, an economy car made at its Shanghai and Austin facilities, the best-selling car "of any kind" by 2023. "Basically, we need Austin to get online. And then, Berlin to get online. And then, reach volume production," he said.

A Technical Analyst's Take 

Even on the technical front, Tesla's stock may be primed for a takeoff. Piper Sandler's chief market technician Craig Johnson told CNBC yesterday that the stock has "likely reversed a downtrend." He said, "We're now challenging some highs around $763 and we're setting ourselves up to go back and retest the old high so clearly again a lot of upside." Tesla's 52-week high was $900.42, posted back in January. Piper Sandler has a price target of $1,200 for the stock.

Simpler Trading's head of options, Danielle Shay, also expressed optimism for Tesla during the interview. According to her, Tesla will do "even better" when the chip shortage is over. "We have more people in not only Europe but the U.S. and China also switching to electric vehicles as well. And we haven't even really seen what Tesla can do with Tesla solar yet, so I'm definitely a buyer of Tesla." Musk has said that the chip shortage will end next year.

As of this writing, Tesla stock is changing hands at $805.72, up nearly 2% from its price a day earlier.