Model 3 Production Remains Sluggish, But Tesla Is Making Progress

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On Wednesday, Tesla (NYSE:TSLA) published its production and delivery update for Q4 2017, indicating that it delivered just 1,550 units of the Model 3 with the production of the mass-market sedan standing at 2,425 units, which was well below Wall Street estimates. Tesla also backtracked on its production targets again, indicating that it only expects to achieve a weekly production rate of about 2,500 Model 3 vehicles by the end of Q1, down from its previous target of producing 5,000 vehicles in the same time frame. Tesla now expects to achieve a 5k production run rate by the end of Q2. While the markets reacted negatively to the news, given that Tesla’s ability to manufacture the Model 3 profitably at large scale is viewed as a crucial valuation lever for the company, Tesla is still making progress with its production ramp.

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

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Production of the Model 3 has proven more difficult than Tesla had initially anticipated, as the manufacturing process deploys significantly more automation compared to the process for the higher-end Model S and Model X vehicles, making it challenging to bring processes online at the early stages of the production ramp. However, Tesla said that its production rate has grown to a point where it has made as many Model 3s since December 9th as it did in four months of Model 3 production up to that point. The company also noted that it had hit a production run rate of over 1,000 Model 3s per week towards the end of 2017. Tesla also says that it is focusing on quality and efficiency instead of just pushing for the highest volumes. This could be crucial if Tesla intends to meet its gross margin targets of 25% on the Model 3 in 2018.

Separately, Tesla’s premium vehicles had a strong quarter, with the company delivering 15,200 Model S sedans and 13,120 Model X SUVs. This implies that combined deliveries of the Model X and S rose by 27% over Q4 2016. However, production of these two models declined to roughly 22,000 units, as the company reallocated some of its work force towards Model 3 production.

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