Tesla’s Model 3 Production Builds Momentum, But Misses Targets Again

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Tesla (NYSE:TSLA) published its production figures for Q1 2018, indicating that it has made significant progress in scaling up production of its mass-market sedan, the Model 3, which saw production rise fourfold quarter-over-quarter to 9,766 units. Although the company fell short of its goal of producing 2,500 Model 3s a week by the end of Q1 2018 (it produced 2020 Model 3 cars over the last seven days, including two days in April) we believe that the progress is nevertheless encouraging for the company.

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Demand Remains Strong

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Although demand for the Model 3 hasn’t really been an issue, production of the Model 3 has proven more difficult than Tesla had initially anticipated. The manufacturing process deploys more automation compared to higher-end vehicles, making it challenging to bring processes online at the early stages of the production ramp. However, Tesla said that it was able to increase its weekly production rate from 793 units in the final seven days of 2017 to 2020 units over the last week, as it swiftly addressed production and supply chain bottlenecks over the quarter. The company is looking to scale up production further, guiding for a weekly production rate of 5k Model 3 cars in about three months. Achieving this production rate could allow Tesla to improve gross margins and operating cash flows significantly. Under these circumstances, the company indicated that it would not need to raise additional equity or debt this year, apart from its standard credit lines. Approaching these production levels would also imply that the Model 3 will be Tesla’s biggest revenue generator from the second quarter onwards, considering that the company’s premium Model X and S deliveries are likely to remain largely steady year-over-year.

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