Why Tesla Needs the Gigafactory More Than Strong Model S Sales

Updated from July 30 to reflect agreement between Panasonic and Tesla on Gigafactory in fifth paragraph.

NEW YORK (TheStreet) –– Tesla Motors (TSLA) second-quarter results may show that there's continued healthy demand around the world for the Model S, but the electric carmaker's upcoming plans for its Gigafactory are where investors should be focused.

Morgan Stanley analyst Adam Jonas, who rates Tesla overweight with a $320 price target, notes that while deliveries will likely come in higher than expected (he's expecting 7,725 units), the larger focus will revolve around the Gigafactory, where the company will house all parts for its vehicles. "All eyes will be on gigafactory site/state selection and partner designation," Jonas wrote in a research note. "Any delays from here could threaten timing of Gen 3 launch."

Tesla recently confirmed that the third-generation model, which is due around 2017, would be named the Model 3, following comments CEO Elon Musk made about the company calling it the Model E, and Ford F subsequently filing a lawsuit, saying it owned the trademark to the Model E name.

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Confirmed: Our Gen III car, due out after Model X, will be named Model 3. http://t.co/PLhUzycSlp pic.twitter.com/noZf17LXre

In February, Tesla unveiled plans for a Gigafactory, noting it expects to reach production unit rates of 500,000 cars per year by 2020 as a result of the new manufacturing center in addition to helping cut battery costs by more than 30% by 2017, when the mass market Model 3 is scheduled for public sales. Tesla recently said that not only are Arizona, Nevada, New Mexico and Texas finalists for the plant, but California has also been added to the list.

On July 31, Panasonic and Tesla announced an agreement making Panasonic an official partner in the Gigafactory, with Tesla managing the building and the land, and Panasonic manufacturing and supplying the lithium-ion cells, as well as investing in the plant. Tesla will take the cells and other components to assemble battery modules and packs. To meet the projected demand for cells, Tesla will continue to purchase battery cells produced in Panasonic's factories in Japan. 

UBS analyst Colin Langan said shares "will trade on the conference call commentary around expected deliveries, demand in China & Europe, and the Gigafactory timing (ground breaking expected in June)." Langan rates shares "neutral" with a $200 price target.

Shares have not reacted to any hint at a delay for the factory, having gained nearly 50% year to date, as investors applaud Tesla's plans for the future, and more importantly, Musk's candor. This comes following a 352% move in 2013, as Tesla outpaced a 41.1% gain in the NASDAQ, and a 31.8% return in the S&P 500, not including dividends.

For the second quarter, Tesla said it expects to deliver about 7,500 Model S units as the company looks to surpass 35,000 Model S deliveries for the year. The company noted it looks to produce between 8,500 and 9,000 cars for the quarter, up 13% to 19% sequentially.

Read More: Here's What It Looks Like Inside Tesla's Massive Factory

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