Tesla Q3 Preview: Model 3 Production Ramp In Focus

Tesla (NYSE:TSLA) is expected to publish its Q3 2017 results on November 1, reporting on a quarter that saw the company commence production of its mass-market Model 3 sedan. Tesla has already published its production and delivery figures for the quarter, indicating that it manufactured just 260 Model 3 cars since it began production in late July, well below its guidance of 1,500 units for the period. While the company attributes this to delays in activating some manufacturing subsystems, noting that there were no fundamental issues with Model 3 production or supply chain, we will be looking for more information on the delays, as well as updated production guidance during the company’s earnings call.

We have a $205 per share price estimate for Tesla, which is well below the current market price. Read our current stance on Tesla here.

See our full analysis for Tesla

We view Tesla’s ability to manufacture the Model 3 profitably, at large scale, as the most crucial valuation lever for the company, as the sedan accounts for about 65% of our price estimate for Tesla’s stock. Demand for the Model 3 has been very strong, with Tesla estimated to have garnered more than 450k reservations for the vehicle, with current waiting periods estimated at between 12 to 18 months. Tesla had previously indicated that it would reach a production run rate of 5k units per week by the end of 2017 while scaling up to almost 10k cars per week at some point next year. This now appears increasingly unlikely, and investors will be looking to gauge whether the initial delays are only temporary troubles or if they could turn into a more structural issue that could hamper volume growth in the near to medium term. The impact of the production issues on profitability will also be a key factor to watch, as Tesla indicated that gross margins on the vehicle could come in at around 25% at some point next year. If Tesla underestimated the complexity of mass manufacturing the vehicle, it may see pressure on margins or have to increase prices, which could impact volumes.

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