The one chart that should give Tesla investors a panic attack

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If you follow comments from Tesla’s CEO Elon Musk, you already know Tesla’s biggest problem is keeping up with incredible demand for the company’s cars. Analysts, however, are starting to call foul. John Lovallo (Bank of America Merrill Lynch) went so far as to lower his price target on the stock to $65 based on what he says are demand problems at Tesla.

Is the market really overvaluing Tesla by almost 70 percent? If you believe numbers from Paulo Santos, Think Finance (source), perhaps it is. Here’s a chart showing Tesla’s production through Q4 of 2015, along with Santos’ estimate for Q1 in 2015:

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“Tesla’s management and the bulls consistently argue that the company can stimulate demand at will and that the true issue is capacity and supply,” Lovallo writes. “In our view, this optimistic thesis has been largely debunked, given that we now know Tesla is producing at levels that are both well below past run-rates and the company’s current installed capacity. In other words, Tesla appears to be pulling back on production, which we believe could create the appearance of rising demand” (source).

CEOs can be overly-optimistic – visionary even, which I’d argue Musk is – but numbers are the only yardstick we have to measure supply and demand for Tesla’s cars. If the company’s production numbers are shrinking in the face of rising demand, then there’s an operational problem at Tesla that needs fixed.

If production numbers are slipping because the company needs to demonstrate demand for its vehicles, there’s a serious problem that could lead to a massive plunge in Tesla’s stock price.

Tesla’s forecasting production of 55,000 vehicles in 2015. That’s 57 percent more than the 35,000 cars they produced last year. If Tesla produces 10,000 cars in Q1 (as Santos predicts), it’s on pace to produce just 40,000 cars in 2015. That’d be a 14 percent increase over last year’s numbers. That’s meaningful growth for a more mature company, but it certainly wouldn’t justify Tesla’s price multiples.

Tesla’s true Q1 production numbers may be the most closely watched metric in the company’s next earnings report. They can say whatever they’d like about demand, but the proof is in the number of Model S sedans that roll off the line.

Tesla’s planning to start production on its Model X this fall. It’ll be interesting to see what happens. If the company can boost Model S production while concurrently launching the Model X, the company will go a long way toward silencing the Lovallos of the world. If the Model X is delayed, and Model S production numbers sag, look for the shorts to have a heyday on TSLA.

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