This week marks the long-awaited beginning of the Tesla Inc. (TSLA, Financial) Model 3 deliveries. Wall Street analysts are so focused in on the number of cars delivered they’re practically scratching marks in bundles of five on their walls.
While the initial deliveries of the world’s first mass-market priced electric vehicle are certainly an exciting event, there are a number of issues to be raised simply by the fact that it is deliveries that investors want to see rather than actual profitability. The ability to deliver a car on time is not what makes a company great. Actually, delivering product on time is just the bare minimum. Get excited about it, sure, but should on-time deliveries really cause Tesla’s stock to rally from a fundamental standpoint?
Short term, maybe, but soon after the initial burst of deliveries is over, investors may start asking other more long-term questions. For starters, there is nobody else making mass market electric vehicles right now. What happens when there is real global competition that Tesla has to deal with on a day-to-day basis? What happens when deliveries will have to be taken for granted instead of considered a bullish sign in themselves?
Reuters, for example, is now reporting that Toyota Motor Corp. (TM, Financial) is planning to mass produce a long-range fast-charging EV by 2022. Toyota obviously has much more experience in the industry than Tesla does, Tesla’s darling status notwithstanding. That, and Toyota does not have to borrow money, dilute its float and keep getting government subsidies just to stay solvent.
Even with subsidies, Tesla has never had a profitable quarter. This itself is not an immediate problem, but eventually Tesla will have to actually start making money. When, exactly? Probably when investors are satisfied with Tesla being able to deliver its vehicles on time and begin to ask different questions that have to do with long-term viability.
Past the delivery question, there are still countless issues that could arise. Is the Model 3’s price point viable? What if there are safety issues that trigger some sort of recall? That may sound unlikely, but keep in mind that Model 3 is the first mass market EV car. As exciting as that is, it’s also going to have some hiccups as most firsts do, some of which may end up being costly.
Outside the issue of competition and potential systemic post-delivery issues, there is the issue of the auto loan market in general and a question of bad timing. Sixteen percent of auto loans are already sub prime, and used car prices are falling indicating an oversupply of vehicles on the market already. What if what is already widely considered an auto loan bubble pops as the Model 3 looks to carve out its market?
Tesla may indeed avoid all these pitfalls. The Model 3 may prove to be a smashing success, and people may just continue to borrow more and more money in order to buy their cars. The point is not to say that Tesla will fall for any of these reasons, but that celebrating successful delivery as the mark of a great company is dangerous. Once the deliveries are successfully completed and hopefully exceed expectations, then the real questions for Tesla will start to materialize. They will be much harder to answer than whether Tesla can literally deliver on its promises.
Disclosure: No positions.
