Tesla’s improved Model 3 results keep Elon Musk’s balls in the air

Tesla produces amazing cars. Generally anyone who has ridden one of their high-end Model S sedans or Model X SUVs walks away with envy for the owner, and perhaps might think of buying one for themself.

The cars have supercar-like (but quiet) acceleration, well thought out features (including extensive over-the-air diagnostics, tracking and updates), long range and compare very favourably with their high-end competitors.

Unfortunately for many, they come with a correspondingly high price (the cheapest available Model S variant lists at $131,00 in NSW, with typical options likely to push the price much higher).

All commentators agree that Tesla’s main game is an affordable but capable mass-market car – enter the Model 3, priced at US$35,000 (A$45,500) for the cheapest configuration plus import costs (although only the expensive configurations are currently being made, and if you are interested the right-hand drive version won’t come before perhaps late 2019).

Announced in March 2016, and originally set for launch by the end of 2017, the Model 3 generated huge interest, with 450,000 (paid) reservation deposits plonked down. Given the average carmaker executive would sell their grandmother for that many cars, the future seemed assured.

The Model 3 production did not go to plan. The launch came with a forecast of production rates of 5,000 per week by now (and even “looks like we can reach 20,000 Model 3 cars per month in December” 2017), but in the words of Elon “production hell” ensued, with gremlins causing a fraught start-up of the highly-automated production line (including the battery module assembly line), and quality problems plaguing early output.

Production was even halted for a week in February The forecast was lowered to 2,500 per week by the end of March 2018, and 5,000 per week by June. Tesla’s production forecasts have been over-optimistic and generally lowered and delayed over time.

Bloomberg even started a “Model 3 tracker” to crowd-source estimated production numbers, and it shows a large jump in rate as the quarter ended. We can safely assume that no-one in the Tesla factory took holidays in the last fortnight.

Although the cars may be highly regarded, that doesn’t always translate into high regard for the company amongst investment analysts. Tesla has become a very unusual share animal – what analysts call a “story stock”.

The bullish focus on the desirability of the cars and the panache of the rock-star CEO Elon Musk; the bears focus on the string of unmet forecasts and deadlines, the cash burn and the corporate manoeuvrings and diversions.

Tesla has not been cash-positive for its 10 year history (with the exception of 2013 when a hoard of government incentive credits pulled it briefly cash-positive), so it has been relying on a series of share and debt issues to keep going.

This is a fascinating battle between the story (longs) and conventional financial valuation (shorts). It’s a “dangerous” short for the bears, because Elon/Tesla has a habit of pulling a rabbit out of the hat regularly (generally a new-product announcement or bullish forecast) and causing the share price to jump.

Many professional shorts (AKA hedge funds) judge it too risky and stay out of the game, but watch intently, and much of the Tesla share register (the longs) are in the “fanboy” classification.

If even hedge funds are cautious, it means it’s not an investment for the faint-hearted.

The outcome of the battle is anyone’s guess. The share price has dropped lately, but so has the amount of short interest.

So all (investor) eyes were on the latest announced production figures last night Australian time, which came in at 2,020 Model 3s in the last week (8,180 delivered for the quarter – only 4 times as many).

The announcement reiterated the 5,000 per week forecast in the current quarter, and that no new debt or equity issues are needed this year – a particular worry for investors given the share price is low (and would have crashed if the production rate missed by a large amount) and the Tesla debt has been downgraded by Moodys (the downgrade specifically mentioned the risk of missing production targets) and is trading lower.

Concerns remain. Having a good week at the end of a good quarter looks good for Tesla when it reports its results, but it’s just the start of making a production line hum reliably, day-in, day-out, and proving that it can produce cars at scale, and make money doing it.

Competition isn’t far behind, with Jaguar’s i-Pace launching in early March at the high end, and the Model 3 facing the Chevrolet Bolt (launched last year), and a large number of similar long-range alternatives (including the Nissan LEAF 230-mile range version, Hyundai Kona EV, Kia Niro EV and Audi eTron) in 2018.

Margins have been questioned but should be fixed once volume increases, and there are worries about the recent cobalt and lithium price surge affecting battery costs.

Quality issues (including a Model S recall, Model 3 panel fit issues) may now be under control, but left-field issues (such as high-profile crashes under autopilot) may still knock Tesla.

Elon is also increasingly under strain as he gets the Model Y into production, builds the Tesla Semi and the second-generation Roadster, completing the Supercharger network, boring tunnels underground, making solar roof tiles, and launching rockets.

In the end, it all comes down to whether Elon can keep all the balls in the air.