Tesla Inc. (TSLA, Financial) continues to struggle meeting its Model 3 delivery targets as management has asked for volunteers in the workforce to accelerate the manufacturing ramp up.
Meeting the delivery target is vital for the company as the market is already turning against Tesla. Over the last month, the stock has fallen more than 20%. As a result, investors might be waking up to the fact the stock is expensive despite strong competition and the company’s inability to meet production targets. Failure to deliver in the upcoming quarter may prove to be detrimental for the bubble stock.
Tesla is striving to meet Model 3 targets
According to Bloomberg, Tesla is prioritizing Model 3 production. The vice president of production told employees in an email that the company is increasing Model 3 production volume by temporarily halting the production of the Model S and Model X.
Mass production is a problem Tesla has yet to solve
This is not a good development. A motivational email to employees is one thing, but halting the production of other models to meet targets points toward a more long-term problem. The company is not well equipped to churn out the number of automobiles it is promising. Even if the company manages to meet the target, it’s a short-term solution. Tesla cannot afford to halt the production of the Model S and Model X indefinitely. In short, mass production is a problem the company has yet to solve.
Moreover, pushing for volume production can also result in quality control problems, leading to warranty claims and related expenses.
Bloomberg also reported that Dan Edmunds, director of vehicle testing, said the fact Tesla would "ship a car that doesn't have everything all worked out is a bit off-putting."
In addition, a review from GreenCarReports notes the build quality of the Model 3 is terrible.
Living up to the stock price is a part of the problem
Tesla needs to focus on quality and quit trying to prove it’s going to dominate the automobile market. The company is doing exactly the opposite by trying to produce more vehicles, faster. One vice president said the following in a memo to employees:
“Let’s make them regret ever betting against us. You will prove a bunch of haters wrong.”
This price justifying behavior from Tesla can hurt its long-term prospects. No, Tesla won’t overtake the automobile market. There are a lot of players lining up their own electric models with similar ranges. Companies like Volkswagen (XTER:VOW, Financial) have the production capabilities and experience to churn out a large number of electric cars. Volkswagen recently unveiled its plasn to produce electric vehicles at 16 sites with a $25 billion investment in battery cell contracts.
Unless Tesla stops chasing its stock price and sets realistic targets for production and market share, the company is going to collapse along with its stock price. The company still has a chance to set realistic production and market share targets and, therefore, a chance to salvage its presence in the market. If the company keeps chasing its share price, however, it will hit the ground soon enough.
What’s the takeaway for investors?
The reward is simply not there; it’s all risk. The company is struggling to meet production targets. Simply pushing production will hurt the quality and, consequently, the brand name. Tesla isn’t making any money. The company, on average, posted a net loss of around half a billion dollars in each of the last four quarters.
Profitability isn’t in sight as analysts are also projecting a net loss for full-year 2018. Moreover, negative operating cash isn’t helping Tesla’s financial position.
Final thoughts
Tesla’s struggle to meet Model 3 production targets sheds some light on the company's mass-production capabilities. The company should start setting realistic production targets as unachievablely high targets can take a toll on the quality. Tesla must accept it’s not the only player in the market and start acting accordingly. Chasing the stock price will hurt both the company and its investors. Due to production difficulties, the threat of strong competition and persistent losses, Tesla remains a candidate for a short-sell.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
