Another delivery report, another miss for Tesla Inc (NASDAQ:TSLA). And yet, TSLA stock is down less than 2% in the wake of the news. Should TSLA stock be down more?
I don’t think so. Granted, this was a big delivery report because it was the market’s first peak into how quickly TSLA is ramping up Model 3 production and delivery.
The answer is not that quickly, and much slower than what was expected (less than 300 Model 3 vehicles were produced, when management had projected 1,500 earlier).
But early production issues have become part of the game when it comes to TSLA. The other vehicles, Model S and Model X, had similar production issues in the early-going. In fact, these early production issues are so common at TSLA that CEO Elon Musk has a term for it: “production hell.”
Here’s the thing about production hell: TSLA has been through it before and come out the other side with robust production and delivery numbers. The company will follow the same path with the Model 3.
Model 3 Production Issues Are Overblown
There were two glaring problems with Tesla’s third-quarter delivery report.
Firstly, Model 3 production was a complete miss. The company produced and delivered less than 300 Model 3 vehicles. Earlier this year, management was hoping to produce 1,500 Model 3 vehicles in the third quarter.
It was a swing and a wide miss. The press release cites “product bottlenecks” as the reason for the near-term shortfall in Model 3 production numbers. The press release goes on to say that there are “no fundamental issues with the Model 3 production or supply chain” and that these issues are “near-term” in nature.
Sounds like a bunch of excuses, but Tesla’s track record indicates that these production issues are near-term in nature. After all, this sub-300 delivery number really isn’t anything new for TSLA. Both the Model X and Model S have had sub-300 vehicle delivery quarters.
Quarterly delivery numbers for the Model X and Model S now both exceed 10,000. The Model X went from 206 deliveries in the fourth quarter of 2015 to nearly 12,000 deliveries last quarter. The Model X went from 263 deliveries in mid-2012 to more than 14,000 deliveries last quarter.
The Model 3 will follow a similar trajectory. Because of this production ramp dynamic, it still is fairly likely that TSLA ramps up Model 3 production to 10,000 vehicles per week at some point in 2018. In other words, the long-term targets remain achievable.
What About Model S and Model X Production?
The second glaring shortfall in Tesla’s Q3 delivery report was the fact that deliveries only grew 4.5% year-over-year. Yes, you heard that correct. This hyper-growth automotive stock with a bigger valuation than Ford Motor Company (NYSE:F) only grew deliveries by 5% last quarter.
That is especially troubling when you look at Ford’s September sales report, which hit the tape only shortly after Tesla’s Q3 delivery report. Ford’s unit sales rose 9% year-over-year in September, and that growth came on a much, much bigger base.
It’s also troubling when you consider that Tesla is operating in a relatively competition-free electric vehicle environment. Competition is going to really heat up in this space over the next several years, so TSLA better get its production act together before customers start ditching the long-lines and opting for other electric vehicles.
But again, it seems like the market has faith in Tesla. TSLA stock is off less than 2%, and with good reason.
Long-term production targets haven’t been reduced. That is a vote of confidence from management. Plus, Tesla has been in the game of mass electric vehicle production longer than anybody else, so it’s very likely that competitors entering this space in full-force over the next several years will hit the same production snags Tesla is facing right now.
At that point in time, though, Tesla will have largely moved past these early-stage production snags. While competitors struggle, Tesla will be operating at full capacity. This will make Tesla vehicles that much more attractive than the competition.
Bottom Line on TSLA stock
Model 3 production is really, really slow right now. But so was Model X and Model S production at the onset. Now, Tesla is cranking out 20,000-plus Model X and Model S vehicles per quarter. Model 3 will follow a similar production ramp.
Model X and Model S production has flatlined in that 20,000 to 30,000 range. But management expects to deliver about 100,000 Model X and Model S vehicles this year. That would represent very strong 31% year-over-year growth.
All in all, the delivery report wasn’t pretty, but it doesn’t dramatically alter the long-term growth picture for TSLA stock. That is why the stock is down only 2% on pretty wide production misses.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
