The Tesla Model X with open gull-wing doors. Daniel Boczarski, Getty Images

Tesla Puts the S in S-Curve — S as in Steep, That Is

Tesla delivered more vehicles than it produced for the first time in almost two years and raised sales guidance for its established Model S and X vehicles. The heralded Model 3, however, made up a tiny percentage of the total.

Tesla’s S-curve is starting to look more like a sheer cliff-face. As an investor, you either relish the challenge or peer over the edge with a smidgen of trepidation.

Late Monday, Tesla Inc. reported production and deliveries for the third quarter. There were two pieces of good news. First, the company delivered more vehicles than it produced for the first time in almost two years. Second, it raised sales guidance for its established Model S and X vehicles. Previously, it had expected to sell slightly more of these in the second half than the first, implying maybe 95,000 for the year as a whole. It now expects to deliver 100,000 in 2017, a 31% jump compared with 2016.

Given a somewhat patchy history when it comes to hitting targets or earnings forecasts, this will no doubt come as good news to many Tesla investors — although, to be fair, they rarely display noticeable concern about such things.

Yet the bad news overshadows all this.

The bad news concerns the Model 3, Tesla’s cheaper vehicle launched in July. Only 260 of these were made in the third quarter, of which 220 were actually delivered.

Only in August, the company expressed confidence it could produce more than 1,500 in the quarter (already a big downgrade to earlier targets). Given that 30 were delivered in July, that implied a weekly run rate of at least 170 by the end of September — and actually more than that, if production was truly following an S-curve, as per Tesla's guidance.

As it is, the average for the past two months is about 26 per week.

Tesla blames bottlenecks on a mere “handful” of subsystems at its manufacturing plants for the weak figures. It went out of its way in Monday’s announcement to emphasize the problem wasn’t a bigger one: “It is important to emphasize that there are no fundamental issues with the Model 3 production or supply chain. We understand what needs to be fixed and we are confident of addressing the manufacturing bottleneck issues in the near-term.”

On the importance of this point, Tesla is spot-on. An extra 5,000 or 6,000 Model S and X deliveries is nice, but unlikely to make much difference to Tesla’s ferocious rate of cash burn, forecast to be $1.6 billion for the second half, according to estimates compiled by Bloomberg. Nor do they justify a current valuation multiple of 29 times 2018 Ebitda.

The Model 3’s success is critical, demonstrating that Tesla can cultivate a much wider market for its vehicles — going up against increasingly electrified incumbent automakers over time — and that the manufacturing prowess of which CEO Elon Musk has boasted repeatedly is real.

Living up to that just got way harder.

In August, Tesla expected to be producing 5,000 a week by the end of December. That implied an increase of 44 times the average weekly production rate of the third-quarter — based on the old guidance, that is.

Using the actual numbers for the quarter just gone, the required ramp-up is now on the order of 250 times — soaring, steep, sheer. 

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

TAGS: Finance
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