2018 Will Be All About Execution For Tesla

Tesla (NYSE:TSLA) had a relatively solid 2017. While the company’s stock performed well, rising by over 40%, driven by its new product launches, the company’s financial issues continued as it burned through cash while adding to its debt load. Moreover, sales of Tesla’s premium vehicles appear to be flattening off, with deliveries of the Model X and Model S remaining at levels of roughly 25k over the last three quarters. While 2017 was all about promises and new product introductions for Tesla (Model 3, Roadster, Semi, Solar Roof) we believe that 2018 will be all about execution, particularly on the Model 3 and solar energy business.

We have a $206 per share price estimate for Tesla, which is well below the current market price.

See our full analysis for Tesla

Model 3 Ramp Up In Focus

Tesla launched its first mass-market sedan, the Model 3, in late July 2017. Demand for the new vehicle has been robust, with the company estimated to have garnered more than 450k reservations for the vehicle, while waiting periods are estimated at as much as 18 months. However, Tesla has been facing significant production issues with the new vehicle. For instance, the company manufactured just 260 vehicles over Q3, well below its guidance of 1,500 units for the period. Tesla initially expected to ramp up production to a rate of 5k Model 3 vehicles a week by the end of 2017, but the company now expects to see this achieved only by late Q1 2018. While the early issues are understandable, given that the Model 3 production process deploys significantly more automation compared to the production process for the high-end Model S and Model X vehicles, Tesla could risk alienating customers if its production issues persist. Tesla has also guided for gross margins of as much as 25% on the mass market sedan at some point next year. 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 close to 65% of our price estimate for Tesla’s stock.

Tesla’s Solar Energy Business Looking To Get Back On Track

Tesla has been looking to shake up the solar market following its $2 billion acquisition of SolarCity in 2016. While the performance of the solar operations has been mixed in recent quarters, with installations over Q3 dropping to 109 MW of generation capacity over Q3, down from the 187 MW SolarCity solar city deployed in the year-ago period, Tesla has been focusing on restructuring SolarCity’s operations. Firstly, the company is looking to transform its sales and marketing model by ceasing SolarCity’s aggressive door-to-door sales model and focusing on selling solar panels through Tesla showrooms – which are located in high-visibility areas. The company is also focusing on product differentiation with its Solar Roof product, which embeds photovoltaic cells into glass roof tiles. Tesla also recently commenced production of solar panels at its Gigafactory 2 plant, with plans to produce about 1 GW of panels by 2019. The company intends to eventually expand capacity to 2 GW per year. We will be closely watching Tesla’s progress with scaling up its solar production and getting its solar business back on track.

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