5,000 Cars per Week Yielded a 10% Drop in TSLA Shares

Tesla shares fell 10% following news that the company hit its goal of producing 5,000 Model 3s per week. The stock will be a bumpy ride over the next few years, but we remain optimistic that Tesla represents considerable upside in large-cap tech over the next 2-5 years. Here are some investor concerns that may have driven the stock down.

Concern: Average weekly Model 3 production did not improve from the end of the March quarter. Our perspective: Tesla is getting better at producing Model 3s. While average weekly production was consistent from the end of the March quarter at 2,400 per week, it was an increase from the 633 average weekly production in the March quarter.

Concern: Model 3 has quality issues. Our perspective: While the company stopped a standard brake and alignment test, it did so because the test was redundant. There were no brake problems reported beyond the Consumer Report test which Tesla fixed with a software update.

Concern: The company will be profitable in Sep-18, but it won’t be sustainable. Our perspective: We agree in the short term. Tesla is still 3-4 quarters away from sustained profitability given that a favorable ASP mix on Model 3 will inch the company into profits in the Sep-18 and Dec-18 quarters. The key is that demand remains high for Model 3 and production is improving. As that scales in 2019, the company should have more sustained profits. One note: the company will dip back into a temporary loss when it ramps production of Model Y (SUV) in 2020.

The Elon Musk factor. While we feel better about the progress Tesla is making, we are more concerned about Elon Musk’s investor and media relations. The latest episode involved Musk taking to Twitter to criticize a reporter for a story related to Model 3 brake certification. Perhaps there is a new leadership approach that is more combative (e.g. Donald Trump, and to a lesser extent, Elon Musk), but we prefer a more stoic approach. More to come.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

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