Profitability Looming For Tesla Motors Inc. As Model 3 Orders Top 325k

  • 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.

Brian Wu Brian Wu   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

show more

Comments on this article and TSLA stock

user profile picture
Execution is the only activity that matters in the manufacturing game. Historically Tesla has scored poorly with regard to the traditional metrics and has shied away from employing big three talent. I'm taking the under here, in terms of their "we know better" approach. Under on quality, OTD, cost/efficiency and cash flow.
3 1 reply
user profile picture
Execution is key and Tesla lacks as you stated. Author provides no justification as to why Tesla Model 3 annual deliveries will reach 350k any time soon.

So far in 2016, Tesla has only delivered ~15,000 vehicles. Getting to 350k annually is a huge jump in manufacturing, supply chain, etc. I'd be surprised if they hit that number in the next 3 years.
Do share this awesome post