Tesla Model 3 Production Up 900% In Q4, May Pass Bolt As #2 Selling BEV In January
Jan. 8, 2018 2:35 PM ET|147 comments| About: Tesla Motors (TSLA), Includes: BMWYY, CVX, F, GM, NSANF, NSANY, TM, VLKAF, VLKAY, VLKPY
Ross Tessien
Ross Tessien
Solar, carmakers, energy, long/short equity
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Summary
Model 3 production reaches 1,000 cars / wk, may pass Bolt for #2 sales position just behind Model S in January if that rate holds for the next 4 weeks.
Sales up 900% in a single quarter, 400% still to go in Q1 and Q2 to reach initial goal of 5k/wk.
Myriad (possibly "un") reasonable assumptions yield Market cap increase of >$6B once Q1 2018 Earnings Call is presented around April 2.
Price targets $352 in April and >$400 in July after respective Earnings Calls based on Model 3 sales ramp to 2,500 units per week.
Resolution of production problems has begun
Tesla Model 3 production is finally starting to ramp up. The ever increasing production rate passed 1,000 vehicles per week for the last few days of 2017 according to Tesla. New targets are 2,500 by end of Q1, 5,000 per week by summer and if that's accomplished, then perhaps the 10k per week may still be realized before the end of Q4 2018.
Tesla valuation is closely tied to both the Model 3 production rate and perhaps even more so to that lines gross profitability. The first meaningful Earnings call to dig into those numbers will occur in early April, and much better detail will be had at the July Earnings call.
The above drone fly over image of one Tesla parking lot published by Electrek here shows a large number of Model 3's being readied for delivery to customers.
A December 10 video showed a Model 3 with a VIN number of 2049 which appears to back up the increasing production claims. If true it means production has just now reached 4,000 vehicles per month compared to the Chevrolet Bolt sales of about 3,227 units per month in December. This is to say that Tesla has just added around $200 million per month in sales and potentially around $50 million per month in gross profit.
Last November 1, Bears were writing that the Chevrolet Bolt outsold the Tesla Model 3 by 24 : 1. That is to say, by 2400%. That article is typical of Bearish articles that in my opinion are missing the point and spinning the data to create negative sensational headlines.
For Tesla, the low sales numbers were simply a result of initial problems with a minority of the production line robotic stations. The entire line moves to the beat of the worst problem child robot, and, engineering solutions take time to develop and then to build and then to install so that production speed can finally increase.
According to Insideevs here, sales for the Bolt in September and December respectively were 2,632 and 3,227. That's a respectable 22% increase in a single quarter. But in the same 3 month time frame, the Model 3 sales increased from 117 to 1,060 which is a whopping 906% increase.
Even today in spite of a 900% increase in production rate, Bearish articles continue to fly. Bullish counter points can be found in this and earlier articles I've written for example here, here, and here. Bearish articles repeatedly focus on missed deadlines, errors in future prognostications and so on. Bullish articles in contrast focus on increasing production, increasing demand, increasing sales, and so on.
In my opinion, the latter has more connection to how the future will unfold and the former will be forgotten once production finally makes it to the originally stated goals, albeit a bit behind schedule.
If the end of December production rate (1k/wk) can be held through January, then the Model 3 will claim Bolt's #2 sales position bumping the Bolt to #3. And Model 3 sales will have grown by about 400% in a single month. Bumping Bolt to #3 slot is a cold hard fact, not some made up statistic, so we'll see if Tesla can do it in January.
1,000 cars per week, even if for just a few days at the end of the year, is a nice accomplishment. Still, Tesla is still just 20% of their initial goal for Model 3 production. Even so the Model 3 has now added it's own dark blue extension to the right most bar of Tesla sales on the graph above.
The Q4 bar of the Tesla Model S, X, and 3 sales graph above displays a significant increase in height for Model 3 sales compared to Q3 where Model 3 sales were barely visible atop the S and X bar in yet another Electrek article here.
In another upbeat factoid, Tesla's recent sales results turned out to be double Adam Jonas' estimates, one of Tesla's most Bullish analysts at Morgan Stanley.
Possible Valuation Increase
OK, sales are finally ramping up and they are still behind goals. Do the sales at their current rate alter how we should expect Tesla to be valued?
1,000 cars per week at $45,000 per car will generate revenue of around $180 million per month. If I make some very rough guesses that the Model 3 and it's successors production line and tooling will last for 15 years, allowing for 5.22% effective interest and a $0 future value of the assembly line, we can guess that the Gross Present Value of the market cap based on sum of parts accounting for Model 3 additions with a gross profit of 25% * $180M sales revenue would be around $6 Billion.
Based on this figure Tesla share price would increase to approximately:
$316.62 * ($59B/$53B) = $352
This is below Adam Jonas' target of $379 and seems reasonable to my estimation.
Of course predicting Tesla share price is certainly not this easy. But this is at least indicative that the valuation could rise by as much as $36 per share for every sales increase of 1,000 Model 3 cars per week. Notice too that the lofty goal of 10k/wk production rate by year end would by this accounting yield a stock price target of over $600 per share.
If Tesla reaches it's goal of 2,500 units per week by the end of Q1 the stock price might rise to $407 following the Q1 Earnings call early May.
If Tesla reaches it's goal of 5,000 units per week by the end of Q2, the same logic would lead to an increase in stock price of around $180 or a price target of $496. These values can be used as a rough guide to how the stock price may move in response to Model 3 sales ramp during Q1 through Q4 this year.
For now, I'll stick with my price target for later this year when Tesla reaches 5,000 units per week of greater than $400.
Tesla has of course many other issues to deal with, several of which detract from it's valuation making a conservative estimate prudent. And Tesla stock price moves up and down due to numerous factors including, in my opinion, the emotional result of the ratio between numbers of Bear and Bull articles published, which really has little to do with genuine underlying value.
Finally, let me add that if Tesla manages to get the Model 3 production line to the design rate of 5,000 units per week, and then double that to 10k, Tesla gross revenue will be around $1.8 Billion per month by year end for that line alone.
If the 25% projected margin also holds, then gross profits for the Model 3 line may reach a rate of $450M per month or $5.4 Billion per year by the end of Q4 2018.
Debt service from what I've found is below $1B per year, meaning that as long as Model 3 production continues to improve, I find projections that Tesla will soon go bankrupt ludicrous.
Conclusion:
It appears Tesla stock is poised for another significant upward rise in 2018.
I would be extremely wary of being short Tesla at the moment and would immediately get out of any short positions I held. Either be long or on the sidelines, but definitely not short.
This advice is diametrically opposed to Bearish expectations that are poised for Tesla to go BK and recommend taking a big dip in Shortville.
As an engineer, what's going on makes perfect sense to me and the logic of the Bears misses the point.
To project that Tesla is quickly headed to bankruptcy is similar to expecting the stage to drive over the cliff because the bridge is out. The coach driver will simply pull back on the reigns and wait for the bridge to be rebuilt and then continue on. Musk is at least this smart and has the cash to pause if necessary.
My price target is $400 on or before the August Q2 Earnings call. I recommend buying long term calls after the dips with maturity dates following the next two earnings calls. If Tesla reaches 5k/wk by summer, this price target could double.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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