For Tesla, 2018 is all about getting Model 3 production going

Tesla Inc. investors will likely greet 2018 in much the same way that they greeted the last new year: fervently hoping that Model 3 production will finally get on track.

Tesla’s stock-price performance in the year ahead will heavily depend on the Silicon Valley car maker ironing out production problems that have so far hampered the manufacturing of the Model 3 in meaningful quantities.

“The year will be all about the rate of the ramp-up of the Model 3,” said David Whiston, an analyst with Morningstar.

Tesla TSLA, -1.73%  launched the Model 3, its first electric vehicle aimed at the masses, in July.

In May, Tesla told shareholders it planned to ramp up Model 3 production to 5,000 vehicles a week at some point in 2017, and to 10,000 a week in 2018.

Less than six months later, it disclosed “production bottlenecks,” and by November moved the goal of producing 5,000 Model 3 sedans a week to late in the first quarter of 2018, putting additional pressure on the company’s cash position.

Achieving a rate of Model 3 production in the thousands a week is not the only challenge facing Tesla. Many on Wall Street worry that the company is spreading itself thin, to say nothing of Chief Executive Elon Musk’s other commitments, from established rocket company Space Exploration Technologies Corp., or SpaceX, to The Boring Company, a tunnel-boring venture he started out of his frustration with Los Angeles traffic.

Growing list of future projects

Tesla in November launched its commercial heavy-duty truck, the Tesla Semi, and surprised observers by also showing off a new version of its ultra-luxury sports car, the Roadster.

See also: PepsiCo orders 100 Tesla Semi trucks in biggest deal since launch

Those vehicles have been promised for 2019 and 2020, with Tesla already putting up reservation systems online. Companies including Wal-Mart Stores Inc. WMT, +0.06% J.B Hunt Transport Services Inc. JBHT, +0.41% the U.S. unit of Anheuser-Busch InBev SA ABI, +0.06% Sysco Corp. SYY, +0.26%  and PepsiCo Inc. PEP, +0.03%  have placed orders for the big rig.

Tesla has a lot on its plate, and might need another assembly plant soon, Whiston said. It just doesn’t seem possible to juggle its passenger and commercial vehicles all in one factory, he said.

Tesla has said it would build a factory in China in the next few years, although Musk has said the company will not make significant investments there until 2019.

Read more: Tesla shares will go on a wild ride in 2018, Morgan Stanley says

The long-haul, commercial truck also brings a powering challenge, and Tesla is planning to build a solar-powered network of “megacharger” stations to accommodate that need, analysts at Goldman Sachs said in a note.

That type of charging station is expected to cost four times as much as a regular “supercharging” station, the ones that Tesla has peppered on highways and major roads across the globe, which cost about $200,000 a piece, they said.

Other projects include the Tesla solar roof and the “Model Y,” a compact SUV, at some point in the future.

Related: Want the new Tesla Roadster in 2020? Prepare to pay Tesla $250,000 now

In addition, Musk recently hinted at Tesla making its own hardware to power its driverless-car software, potentially severing a relationship with Nvidia Corp. NVDA, -0.11% He has also talked about having a completely autonomous Model S sedan drive itself from Los Angeles to New York next year, a trip that had been promised for 2017.

Model 3 delays weighs on Tesla shares, bonds

The delays with the Model 3 have weighed on Tesla’s shares and its first pure bonds, the $1.8 billion of 5.300% notes that mature in August of 2025 that the company sold in August. The bonds, which had raised eyebrows during the company’s roadshow for offering fewer-than-usual protections for bondholders, including weaker covenants, fell below par shortly after issuance.

The bonds recently traded at 94.697 cents on the dollar to yield 6.177%, according to trading platform MarketAxess, or at a yield spread of 379 basis points over Treasurys. The notes held above 97 cents on the dollar for most of October before turning lower. Their weak performance could signal that bond investors, at least, will start looking for higher premiums to take on what they perceive to be greater risk.

Tesla’s shares, meanwhile, have notched monthly declines in September, October, and November. They have gained 9% in December.

Rallies earlier in 2017 are ensuring the stock outperforms the S&P 500 index SPX, -0.01%  in 2017, up more than 50% in the year compared with gains around 20% for the benchmark and 25% for the Dow Jones Industrial Average DJIA, +0.06%

Wall Street has long speculated about when, not if, Tesla will tap the capital markets again, with most people betting on a capital raise in the first half of the year.

A failure to straighten out the Model 3 production issues could hasten that timeline, said Efraim Levy, an analyst with CFRA. But time could be on Tesla’s side, Levy said. If Tesla shows its Model 3 production issues are a thing of the past, the stock would return to gains.

“They are going to straighten it out, the question is when,” he said.

Stiffer competition

The longer it takes, however, the stiffer the competition with other relatively low-price electric vehicles, Levy said.

Some future buyers may be bent on owning a Model 3, but others could drift to competitors in the same price range, he said.

A person placing a $1,000 reservation on a Model 3 would wait 12 to 18 months for the car, according to the Tesla website.

General Motors Co. GM, -1.09%  has delivered Chevy Bolt electric sedans by the thousands for months now, and Nissan Motor Co. Ltd. 7201, -0.04%  earlier this year came out with a redesigned version of its Leaf.

Both companies, alongside several major auto makers such as BMW AG BMW, -0.30% have also announced major pushes toward autonomy, either by partnering with technology companies or by venturing in-house.

It all goes back to getting the Model 3 production going, Levy said.

“Until then, it’s a waiting game,” he said.

Filed in: Top News Tags: 

You might like:

Mutual Funds Weekly: Stock market to the bulls: This race is in the final laps Mutual Funds Weekly: Stock market to the bulls: This race is in the final laps
Apple announced more new, permanent jobs than any other company this year Apple announced more new, permanent jobs than any other company this year
The Ratings Game: An expanded PayPal, Facebook partnership could be a ‘game changer’ for both, analyst says The Ratings Game: An expanded PayPal, Facebook partnership could be a ‘game changer’ for both, analyst says
Key Words: Famous French novelist makes case that Trump is one of the best American presidents Key Words: Famous French novelist makes case that Trump is one of the best American presidents
Trump Today: Trump Today: President says he didn’t tell Cohen to break the law and puts fresh pressure on Fed Trump Today: Trump Today: President says he didn’t tell Cohen to break the law and puts fresh pressure on Fed
The Wall Street Journal: Trump inauguration spending under criminal investigation The Wall Street Journal: Trump inauguration spending under criminal investigation
NewsWatch: Here’s more evidence that stocks are now facing a bear market NewsWatch: Here’s more evidence that stocks are now facing a bear market
Capitol Report: Janet Yellen is worried about the next financial crisis Capitol Report: Janet Yellen is worried about the next financial crisis

Leave a Reply

Submit Comment
© 2018 Stock Investors News. All rights reserved. XHTML / CSS Valid.