Home Stocks Tesla Model 3 Ramp May Go Faster Than Expected, But That’s Not What Matters Most

Tesla Model 3 Ramp May Go Faster Than Expected, But That’s Not What Matters Most

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Tesla CEO Elon Musk tweeted new details about the Model 3 ramp, including that they’re planning to roll the first one off the production line on Friday. However, some are suggesting that by Musk’s numbers, it looks like he deftly cut production guidance for this year again—without saying he was cutting his outlook.

Others are pointing out that a faster-than-expected Model 3 ramp matters little if Tesla can’t turn a profit on the car and produce it without major technical problems caused by the lack of a prototype. But if the company turns the Model 3 into a successful, profitable car without any serious problems, the bears won’t have anything else to say.

A very steep Model 3 ramp is planned

Late Sunday night, Musk posted a series of tweets about the Model 3 ramp, informing fans and investors alike that the first car will be produced on Friday, which is two weeks earlier than previously scheduled. They have also planned a “handover party” to turn the first 30 Model 3 cars over to their owners on July 28. Musk also offered an early schedule for the ramp, which involves producing 100 cars in August to more than 1,500 Model 3 cars in September to 20,000 a month in December.

In a note to investors dated July 3, Bernstein analyst Toni Sacconaghi, Jr. compared the ramp timeline given by Musk to his own expectations. Musk’s tweets indicate that Tesla will produce only 1,600 to 1,700 Model 3s in the third quarter, while Sacconaghi had been expecting 3,000 of them to be delivered during the third quarter. However, he had only been expecting 15,000 Model 3s to be delivered in the fourth quarter, compared to Musk’s given timeline indicating 30,000 to be produced during the quarter.

Here are the most important things about the Model 3 ramp

The Bernstein analyst notes that a projected run rate of more than 240,000 cars a year by the end of this year is much better than what most are expecting. However, he feels that the bull thesis for Tesla shares depends not only on the company’s ability to ramp production on the Model 3, but also on its ability to turn a profit on the car and have good build quality on the first Model 3s that roll off the line.

In fact, he feels that the Model 3 production ramp is meaningless if Tesla can’t also achieve the other two points. Because the company struggled to turn a profit on its $100,000 Model X and Model S, he’s concerned that it will struggle even more to make the Model 3 profitable. He also pointed out that Tesla decided to skip the beta prototype phase for the Model 3 in order to meet its previously provided schedule, so he’s worried about quality defects overwhelming the company’s service centers and undermining its strong brand.

Did Tesla just cut its guidance again?

But some have more concerns than Sacconaghi has. Seeking Alpha contributor Bill Maurer said the details Musk provided about the Model 3 ramp suggest that they’ve slashed their guidance again, despite the tweet stating that regulatory requirements were hit two weeks ahead of schedule. He noted that Musk originally called for 100,000 to 200,000 Model 3s to be produced this year but then cut that outlook to approximately 80,000 in a “perfect scenario.” Musk’s tweets now seem to suggest a number closer to 50,000, according to Maurer.

These next few months will be critical for Tesla, as the company may turn out to be its own worst enemy. It took deposits on more than 300,000 Model 3s, so supply rather than demand is the issue here. Tesla also has to keep the Model 3 from cannibalizing its other, more expensive vehicles. Tesla reported on Monday afternoon that it delivered just over 22,000 vehicles during the second quarter, bringing the total for the first half of the year to about 47,100. The company did guide for a sequential decline because it was preparing for the Model 3 ramp, but it’s questionable whether that will be enough to please finicky investors.

After jumping initially on the news about the Model 3 ramp, Tesla shares fell into the red and ended Monday’s shortened trading day down 2.49% at $352.62

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