Tesla hits bumpy road in a troubled week
Tesla investors, more than most, function on belief — a shared vision that electric cars are the future and whoever makes them best will eventually reap big rewards. The past week has sorely tested that faith. On Tuesday, Tesla once again missed its target for ramping up production of its new Model 3 — the mass-market sedan considered the key to the company’s future.
Rather than making 2,500 Model 3s per week by the end of the quarter, the company managed 2,020 last week — and needed an all-out push at its Fremont factory to come that close. For the entire quarter, Tesla built 9,766 Model 3s. When deliveries of the car began last July, CEO Elon Musk forecast that production would reach 5,000 per week before the turn of the year.
While the miss had been widely expected, Tuesday’s production update followed a headspinning week of negative headlines — including a credit downgrade, a recall of Model S sedans and fresh details about a deadly South Bay crash of a Model X operating in Autopilot mode — that questioned both Tesla’s financial health and the safety of its cars. The company’s stock, which traded above $355 as recently as February, fell to $252 on Monday, before the production update’s release.
“It’s all piling on Tesla in a situation where negative sentiment is as bad as I’ve seen since I’ve covered the stock, which is six years,” said Ben Kallo, senior research analyst at Robert W. Baird & Co., before the release of the production update. “It’s important to see the progress they’re making on ramping the Model 3, and they’re under an extreme microscope.”
And yet, even though Tesla didn’t reach its goal, investors appeared to greet Tuesday’s update with a sense of relief. The stock rose 6 percent Tuesday to top $267 per share.
Tesla did, after all, build more than four times as many Model 3s during the first quarter than the 2,425 it made in the final three months of 2017. Counting the company’s Model S sedan and Model X SUV, production at Tesla’s Fremont factory hit 34,494 vehicles for the first quarter, a 40 percent jump from the fourth quarter of 2017 and an all-time high.
Tesla had mounted an intense effort last week to increase production and, in the words of one executive in a memo to employees, “prove a bunch of haters wrong.” But in its Tuesday update, the company insisted that last week’s production pace was not a fluke.
Instead, Tesla predicted it would build 2,000 Model 3s this week and remained on track to hit its previously announced goal of 5,000 per week by the end of the second quarter. CEO Elon Musk tweeted that he was “back to sleeping at factory,” a step he took during the difficult launch of the Model X SUV.
“This is the fastest growth of any automotive company in the modern era,” the update read. “We were able to double the weekly Model 3 production rate during the quarter by rapidly addressing production and supply chain bottlenecks, including several short factory shutdowns to upgrade equipment.”
The company delivered 29,980 vehicles to customers during the first quarter, including 8,180 Model 3s. An additional 2,040 Model 3s were in transit to customers at the quarter’s end.
Even as Tesla’s factory revved up operations last week, the company was buffeted by a string of difficult developments.
The National Transportation Safety Board reported that it had sent two investigators to probe the fatal March 23 crash of a Model X on Highway 101 near Mountain View. Tesla reported last week that the vehicle had been operating in its self-steering Autopilot mode at the time it slammed into a concrete median. Following the death last month of a pedestrian in Arizona who was hit by a selfdriving Uber SUV, the incident heightened fears about the safety of autonomous vehicles.
Tesla issued what is believed to be its largest recall to date, saying it needed to swap out bolts in the power steering system of 123,000 Model S sedans built before April 2016. The bolts had shown unusually fast corrosion in some coldweather locations.
Moody’s downgraded the company’s credit rating, saying Tesla would need to raise additional funds this year and possibly in 2019 as well to cover both its substantial cash burn and its maturing debt.
A series of April Fool’s tweets from Musk on Sunday, joking that the company had gone “so bankrupt, you can’t believe it,” failed to lighten the mood.
Even before Tuesday’s update, however, many analysts said they doubted the difficult week would prove to be a major inflection point for the company — at least not if Tesla could show progress on the Model 3.
“The biggest factor for me is that consumer demand for this vehicle is still phenomenal,” said Bill Selesky, senior analyst at Argus Research, speaking before the numbers were released. “If they can just keep the demand level they’ve got right now and hit their delivery targets, everything will be in place.”
The automaker continues to spend money at a rapid rate, one of the reasons Moody’s rating service downgraded it on Tuesday. Financial analysts have been predicting for months that Tesla would need to raise funds this year, possibly by issuing more stock. The market may not be as receptive now as it would have been in February, but Tesla should still be able to raise what it needs, said equity analyst David Whiston with the Morningstar research firm.
“When you had the stock nearly at $390 for a while — while you’re burning cash and no one cared — that would have been a great time,” he said, speaking before the release of the production update. “Despite all the negativity of the past week, we’re not in a distressed situation. And the market may be relieved to see them raise money.”
Tesla on Tuesday insisted that it would not need to issue debt or equity this year, provided it meets its 5,000-perweek production target for the Model 3. Doing so, the company said, would lay “the groundwork for Q3 to have the longsought ideal combination of high volume, good gross margin and strong positive operating cash flow.”
During its short life as a public company, Tesla has provoked an unending debate between believers in its prospects and doubters who point to its continuing losses. The company has still posted just two quarterly profits ever, and not in succession. While the past week — and the production update — may have given “the haters” ammunition, Kallo urged investors to focus on the longer term.
“I feel like we’ve gotten so myopic in what we’re looking for, versus what they’re doing on the bigger plan,” he said.