Given the intense battle between bulls and bears over Tesla (NASDAQ:TSLA) stock, there was no more suitable way for the Tesla Model 3 target to be hit than what happened on Friday.
Tesla had promised 5,000 Model 3s a week by Jun. 30, and it kept that promise — kind of. The 5,000th car hit its quality check a few hours late, but it was enough for bulls to celebrate. Of course, it also gave bears plenty of ammunition. They immediately pointed out that Tesla once again broke a promise, and that some of those vehicles literally were made in a tent.
In short, there was basically no way in which the long-awaited deadline could have been met that would have better cemented the already-massive debate between Tesla supporters and skeptics. In early trading this week, the skeptics were ahead, and TSLA stock was down 9% as of Tuesday afternoon. And longer term, that’s still the side I take — albeit cautiously.
After all, I’ve long advised caution toward both sides of the Tesla trade. I haven’t taken a side myself as of yet. But for now, I still see a lot of reasons for worry here, even with Tesla reaching the 5,000-car-per-week rate.
Is the Tesla Model 3 Target Real?
The skeptical response to the company hitting its 5k target is that Tesla hasn’t “really” hit the target. Had it been the second week in June, for instance, and investors across the world weren’t focused on this precise seven-day period, production wouldn’t have reached the “magic” 5,000 number.
That said, Tesla’s investor update suggests production trends are headed in the right direction. The company expects to produce 6,000 Model 3s per week by the end of August.
And there’s more good news in the report. Tesla reaffirmed guidance for GAAP profits in the second half of the year — and positive cash flow as well. The latter is particularly important, given that bears continue to argue that Tesla will need to raise cash in the near future. (CEO Elon Musk continues to dispute that argument.)
Meanwhile, net reservations were flat quarter-over-quarter at 420,000, despite Tesla delivering over 28,000 Model 3 units in the quarter. In other words, demand is increasing. And Tesla wrote that it expects more reservations to come once Model 3s can be test-driven at Tesla stores.
Are the numbers perfect? No. Was the Tesla Model 3 target hit? Kinda sorta. But the update, on balance, would seem to be good news for TSLA stock.
Why Has Tesla Stock Fallen?
And yet the market hasn’t seen it that way. Tesla stock gained in early trading Monday before reversing. It seems like a “buy the rumor, sell the news” reaction from the market. But it may also be a case of investors now looking past the widely discussed Jun. 30 target and seeing some of the challenges facing the company.
No matter what Musk says, a capital raise still remains at least a possibility over the next few months. Again, Tesla has missed targets before. As Dana Blankenhorn wrote last month, the original goal was to produce 500,000 Tesla Model 3 units in 2018.
As bears point out, Tesla’s existing debt is secured by pretty much all its assets at this point, which means any capital raise would almost certainly have to be an equity offering.
And there’s — still — the question of whether Tesla is not only at a sustainable run rate, but whether that rate can drive the margins Tesla has projected. The extra spend in the quarter on the new line and other factors likely hits near-term gross margin targets.
Longer term, issues with automation could impact Tesla’s financial projections. And quality concerns seem to be another issue, with reports that Tesla skipped a key test, which could raise warranty and service costs down the line.
The Story Goes On
All told, the Tesla Model 3 target doesn’t really change the long-term case. Rather, bulls and bears simply seem to be moving on to the next battle in what looks like the most intensely debated stock in the market. (Amazon.com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) probably are right behind.)
The questions here still remain significant. Tesla at least has proven that it can scale production. But it hasn’t proven that it can do so consistently, and more importantly, profitably.
For a company whose market cap still sits modestly behind that of Ford (NYSE:F) and General Motors (NYSE:GM), much more is needed. Personally, I’m rooting for Tesla, but as an investor, I’m not yet convinced.
As of this writing, Vince Martin has no positions in any securities mentioned.