How Much Can Tesla Be Impacted By The Model 3 Missing Production Schedules?

by Trefis Team
-21.54%
Downside
277
Market
217
Trefis
TSLA
Tesla Motors
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Tesla’s (NYSE:TSLA) first mass-market sedan, the Model 3, has been dealing with production delays since its launch last fall, with Tesla repeatedly cutting production targets. While the company initially expected to reach a production run-rate of 5k vehicles per week at the end of 2017, it now expects that run rate to be achieved by the end of Q2 2018. Production of the Model 3 has proven more difficult than Tesla had 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. As we view the Model 3 as the most important driver of Tesla’s value going forward, accounting for about 60% of our price estimate for its stock, there could be a significant decline in the company’s valuation if there are more structural issues with the production ramp-up of the sedan. We have created an interactive analysis, which explores the impact on Tesla’s stock price if the Model 3 ramp is slower than expected.

Our ~$200 price estimate for Tesla (which is well below the market price) assumes that the company will deliver 125k Model 3 vehicles this year (average of 2.4k per week) with the number growing to 450k by 2022 (8.5k per week). We also estimate that gross margins will rise to about 25% by 2022. However, we estimate that Tesla’s value could see a downside of nearly 30%  if Tesla is only able to grow the production to 370k over the same timeframe, if production issues and capacity constraints persist at its manufacturing facility in Fremont, CA. We assume that gross margins will only rise to about 20% in this downside case.

Tesla’s Model 3 Ramp Has Faced Issues Given High Degree Of Automation

Gross Margins Could Be Impacted By Production Bottlenecks

This Downside Case Could Result In Significant Downside

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