Wall Street Pit

Model 3 Stiff Challenges: Can Tesla Finally Master the Assembly Line? (TSLA)

Tesla (NASDAQ:TSLA) stock hit an all-time high of $386.99 in late June before sliding and remaining in a volatile trend since then. The name’s price-per-share entered bear market territory by dropping 20% to $308.83 on July 6 after the electric vehicle (EV) company disappointed with second-quarter results. There was so much buzz in Q2 about the arrival of Model 3, the car Tesla is positioning for the average consumer market, that people who wanted to buy a car opted to wait. This cannibalized the sales of Model S and Model X, causing the company to miss its 2Q targets.

Tesla has already burned so much cash that such miss will most likely hit hard the company’s financial standing. It already spent $7 billion by the end of the 2Q, leaving the remaining cash at hand at $3 billion, enough only for three-quarter spending. Tesla has a tricky setup that’s based on debts and lofty ambitions, and analysts say the company’s fate is now depending on Model 3’s success.

Current production of Model 3, however, is still in early stages. Tesla delivered the first 30 units of its much anticipated model this past July but only to its employees; car deliveries to non-employees will only materialize in the fourth quarter. To meet this goal, the Palo Alto, Calif.-based company will have to turn the prototype into a working car by ramping up production: 100 units in August and 1,500 in September until the monthly capacity reaches 20,000 by December. That said, Tesla CEO Elon Musk has warned that his company could face a half-year of “manufacturing hell” trying to increase the production pace of the new Model 3 battery-electric sedan. By 2018, monthly production should reach 40,000 units.

It goes without saying, that sticking with the plan is crucial at this point for Tesla. The company’s management knows full well the repercussions of another disappointing delivery result which will lead to their inability of bringing the Model 3 to market in time to beat the competition. Furthermore, this will unavoidably effect in a negative way Tesla’s share performance. For these very important reasons the company cannot afford any more setbacks.

Outside its facilities, Tesla is also facing external challenges. When the Model 3 was first unveiled a year ago, pre-orders shot up to as high as 518,000, a sign indicating that people are ready to adopt EVs. Later on however, the numbers went down to 455,000. It is also ominous that not all remaining pre-orders will translate into actual sales. In fact, only 70% are sure buyers and, if delivery delays occur, only a small fraction of that number would be willing to wait. (Tesla already had bad experiences of delay with previous models.) Add here, insert issues of quality and tax incentives, and actual sales could deteriorate further.

For now, though, there is little information in terms of how the production of Model 3 is proceeding. That means TSLA will most likely remain volatile until the release of Q3 report.

It should be noted that customers are not the only ones who are having mixed thoughts about Tesla’s ability to meet its production targets. Market analysts are also having their own mixed opinions. In fact, in August only 36% of a total of 22 analysts who covered the company, recommended the name a “Buy”. That compares with 36% issuing “Hold” ratings while 28% called ticker a “Sell”. It is worth noting that the “Buy” calls in August saw an increase of 7% from July. In fact, during the first week of July, major Wall Street firms like Goldman Sachs, Bernstein, and Cowen expressed disappointment over Tesla’s 2Q delivery results in notes to clients.

But despite all the speculations and fickle trends, Tesla remains as one of the best-performing stocks this year. As of Aug 31, the name was trading at nearly $356 a share, a  66% year-to-date spike. Back in July, even Musk himself was in disbelief when he stated that the stock price was “higher than [the company has] the right to deserve”.

But he clarified, or better, tried to hedge that statement on Twitter saying: “Tesla stock is obviously high based on past & present, but low if you believe in Tesla’s future.” Analysts tend to agree; they are positive about the long-term profitability of the EV market and Tesla as a company being at the forefront of it, has the ability to grab even more market share and in the process maximize its profits. (Among others, the company manufactures its own batteries and solar panels and its cars already boast advanced features like autonomous driving.)

For now, one thing appears to be sure: Whatever happens to Model 3 will impact Tesla, for better or for worse.