- Tesla shares have been moving lower since the company missed its Q1 delivery target.
- Tesla has at the same time announced that Model 3 orders have topped 325k.
- The high number of orders could mean that Tesla becomes profitable just two years after starting the delivery of Model 3 vehicles.
Tesla (NASDAQ:TSLA) shares have slid about 6% since the EV manufacturer reported that it had delivered only 14,820 vehicles during the first quarter, thus falling short of the company's target of 16k deliveries. Tesla said that its Q1 miss was due to supplier shortages and hubris in adding too much technology into the vehicle. Model 3 is designed as a mass market vehicle and lacks many of the snazzy features that have been dogging Tesla including falcon wing doors. There is therefore less chance that Model 3 production will be held back by the same issues that have been affecting Model X.
With investors attention currently focused on the miss, there is yet another reason to cheer. Tesla has now announced that it has taken down 325K Model 3 orders. The latest tally corresponds to $14B in future sales for the company.
About 70% of Tesla orders have traditionally converted into actual sales. If we knockoff the 30% of pre-orders that are not likely to make it to the finishing line, Tesla would still boast of close to $10B in future sales, or close to double the revenue it pulled-in for 2015. What's truly remarkable about the high number of those Model 3 orders is the organic nature of the orders where Tesla has relied almost exclusively on buzz and brand power to generate interest around the vehicles.
Model X Recall
Meanwhile, Model X continues to be a thorn in Tesla's flesh. Tesla has announced that it has recalled 2,700 Model X vehicles due to a potential defect in the third-row seat belts. Tesla says that it discovered the seat tends to fold forward during its crash tests though no accidents have been reported so far. Tesla says that it decided to do the recall:
''out of an abundance of caution for our customers,''
Although Tesla shares shrugged the recall on the day the report hit news feeds, investors should not be surprised if the shares slip a few more percentage points over the coming days. Tesla tends to receive a lot of media attention, positive or otherwise, and such an event could easily be blown out of proportion. But 2,700 vehicles really is a drop in the proverbial ocean compared to the kind of recalls traditional automakers sometimes have to contend with. Perhaps the most famous recall to-date involves that of vehicles fitted with defective Takata airbags. 34M vehicles in the U.S. have potentially been affected and another 7M already have been recalled worldwide. 10 people have already been killed by the airbags in the U.S. alone. More than two dozen automakers in the U.S. have been affected by the crisis with Honda having recalled more than 5M vehicles due to the faulty airbags.
In the case of Tesla, the only recorded instance when a manufacturing defect might have caused an accident in one of its vehicles was back in 2013 when the battery of a Model S caught fire. No one was injured during the incident though. Tesla's safety record so far speaks for itself and there is no good reason to believe this will change for the worse.
Model 3 Orders Take Tesla Closer to Profitability
Going back to Model 3 orders and their implications, investors have a good reason to be optimistic about Tesla's long-term prospects. Tesla has in the past said that it would become solidly profitable when its deliveries hit 500k vehicles per year. Assuming Model 3 vehicles eventually top 350k while the company is able to achieve its target of 80k-90k Model S and Model X deliveries during the current year, then Tesla will be very close to hitting its 500k target. In fact, there is a solid chance that Tesla will hit 500k deliveries during its the second year of Model 3 deliveries, which implies sometime around late 2018 to early 2019.
Meanwhile, by manufacturing battery packs en masse in its Gigafactory, Tesla will be able to bring down battery production costs which is likely to make its new energy business more competitive as I pointed out in this article. During its last earnings call, Tesla said that the energy business was already profitable, which is remarkable for such a young business. You can expect Tesla shares to hit fresh highs once the company becomes fully profitable.