Tesla Motors (TSLA, Financial), the North American electric vehicle (EV) company, reached its production target for the second quarter, producing more than 5000 Model 3 vehicles during the last seven days.
“Q2 production totaled 53,339 vehicles, a 55% increase from Q1, making it the most productive quarter in Tesla history by far,” said Tesla’s management in a press release Monday.
The company produced a total of 28,578 Model 3 vehicles during the quarter, averaging 2,198 vehicles per week.
The production of Model 3 was up 192% sequentially as the company produced only 751 vehicles per week during the first quarter of 2018. The California-based EV company also produced 24,761 Model S and Model X vehicles during the quarter. The second quarter marks the first time Tesla managed to produce more Model 3 vehicles – its mass market budget electric car – than its Model S and Model X combined. The management expects to produce 6000 Model 3 vehicles per week by the end of July 2018.
It’s worth mentioning that Tesla used an additional, rather quickly built, general assembly facility (GA4) to assemble around 20% of its total Model 3 vehicles produced during the quarter. “We expect that GA3 alone can reach a production rate of 5,000 Model 3s per week soon, but GA4 helped to get us there faster and will also help to exceed that rate,” the management said in the deliveries report released on Monday.
Regarding deliveries, Tesla managed to deliver 40,740 vehicles to its customers during the second quarter of 2018; deliveries fell short of the Street’s estimates. Model 3 deliveries totaled 18,440, with more than 11,000 Model 3 vehicles on their way to customers. Tesla also reaffirmed its positive cash flow guidance for the third and fourth quarter of 2018. The market was unimpressed though as the stock was down more than 2% by market close Monday.
Why isn’t the market rewarding Tesla?
For starters, Tesla managed to post only two profitable quarters during the history of its operations. Although Elon Musk, the CEO of Tesla, is touting positive cash flow during the remaining half of 2018, the market is wary of Tesla’s ability to sustain a high level of Model 3 production.
It’s worth mentioning that Tesla, on average, produced 2,198 Model 3 vehicles per week during the second quarter. It has yet to be seen if the company can sustain its 5000 a week production feat achieved during the last week of the second quarter.
"In the interim, we do not see this production rate as operationally or financially sustainable," analyst Efraim Levy of CFRA, an independent research firm, said after Tesla’s deliveries report. Note that CFRA holds a sell rating on Tesla Motors with a price target of $300.
Moreover, reservations for Model 3 are sky high compared to the number of vehicles being produced. The Fremont factory – Tesla’s production facility – should churn out 420,000 more Model 3 vehicles just to fulfill current reservations. Even if Tesla manages to produce 6000 Model 3s a week during the next couple of quarters, more than half of the existing reservations will go unfulfilled by the end of 2018. The delay in deliveries can ignite potential owners to withdraw their deposits.
Debt is also one of the key reasons the market is hesitant to reward Tesla for reaching its production target. Currently, the company has more than $2.7 billion in cash with an additional $543 million available through a credit facility, making the total liquid funds in excess of $3 billion.
But it has financing available for at most six to eight months, assuming it avoids making additional capital expenditures. The company also recently offered its Fremont factory as collateral in case things go south. In short, the fear of unsustainable production, debt woes, delays in deliveries and inability of Tesla to turn a profit are some of the reasons why the market isn’t rewarding Tesla’s stock.
Final thoughts
Although Tesla crossed the 5000-a-week mark for its Model 3 production, that doesn’t mean the company will produce 5000 Model 3 vehicles a week consistently. Tesla crossed the mark of 2000 Model 3 vehicles a week by the end of the first quarter but averaged only 751 vehicles a week during the first quarter of 2018.
In line with the first quarter, Tesla crossed its production target of 5000 Model 3s a week during the last week of second quarter, but average production stood at 2198 vehicles a week. So when Musk says Tesla will cross 6000 vehicles a week, it means Tesla’s Model 3 production can average between 2200 and 2500 vehicles a week during the third quarter of 2018.
All in all, investors should avoid Tesla Motors amid production uncertainty, financial risk and loss-making potential facing the California-based EV company.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
