Tesla’s Model 3 Production Accelerated In Q2, But Will Its Bottom Line Follow Suit?

by Trefis Team
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Tesla (NYSE:TSLA) is expected to publish its Q2 2018 results on August 1, reporting on the most productive quarter in its history, as it significantly ramped up sales of its new mass-market Model 3 sedan. Although the company’s revenues are expected to scale up over the quarter, as total deliveries rose to nearly 41k vehicles from 22k vehicles a year ago, it’s likely that the company will remain in the red amid high costs associated with its Model 3 ramp-up.

Our interactive dashboard for Tesla outlines our expectations for the company over 2018. You can modify the drivers (in blue dots) to arrive at your own estimates for the company’s revenues and earnings.

Model 3 Remains Key Long-Term Value Driver

Tesla’s ability to produce the Model 3 sedan at scale is viewed as the most important driver of a financial turnaround for the company. Over the second quarter, the company appears to have taken significant steps in this regard. Tesla produced a total of 53,339 vehicles during the quarter, marking a sequential increase of 55%. Production of the Model 3 stood at 28,578 units, exceeding the combined production of the luxury Model S and X vehicles (24,761 units). While the company met its target of producing 5k units of the Model 3 per week during the last week of Q2, it expects the number to approach 6k per week by late next month.

However, Tesla will likely remain in the red over the quarter due to costs associated with scaling up production of the new vehicle. For example, the company had to quickly set up a general assembly line (dubbed GA4) housed under a massive tent at its Fremont facilities. Tesla also apparently bet a bit too heavily on automation for production of the vehicle, and the company has been looking to rectify that issue by going on a hiring spree at its Fremont facility and its battery Gigafactory in Nevada. Over Q1, Tesla said gross margins on the Model 3 were slightly negative for the quarter while indicating that they could be close to break-even in Q2. The company is targeting gross margins of about 25% for the sedan in the long run.

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