TSLA Closing Price: $265.42 as of April 6th, 2016
Tesla recently introduced the Model 3 car, which is slated for delivery in late 2017. The Model 3 is Teslas attempt at producing a mass-market vehicle with a lower price tag than their current offerings. The predicted selling price of the car is 35k, and Tesla announced on Saturday that they have already received about 275,000 reservations. Each reservation requires a $1,000 down payment. If the customer decides they no longer want to purchase the car, Tesla has agreed to return the entire reservation fee. Tesla has said that the reservation fees for the Model 3 and sales from their current vehicles will help fund the huge ramp up in production that they will need to produce 275,000 Model 3 cars by late 2017. To put that in perspective, here is a graph showing money raised via their IPO and money raised via Model 3 reservation fees:
Clearly, this is a big influx of money for them, and an important time in their history. The real question is, can they ramp up production and deliver this many cars in such a short time-frame? The stock is surely priced as if there will be no hiccups or delays in this process, and I believe there is at least a decent chance they will not be able to meet these expectations.
First, Tesla has ALREADY had difficulties in delivering the modest amount of orders for their Model X vehicle. Elon Musk has said that even if a single supplier cant deliver on time, then the entire order must be delayed. Given that Tesla cars are comprised of many more electronics and unique components than your average vehicle, I think we can expect to see more delivery delays until the firms processes are ironed out to perfection. These delays in production for the Model X vehicle indicate to me that a 2017 delivery date for Model 3 orders may be quite optimistic. These part shortfalls are on orders of 14,820 vehicles sold in Q1. How can they possibly deliver 275,000 by the end of 2017 without encountering these same issues?
Next, the company is hemorrhaging cash. The company had negative EPS of over 6 dollars last year. This makes sense given that the company is rapidly expanding. However, it seems very likely that Tesla will need to raise additional capital sooner rather than later. The Model 3 reservation money is not even close to the billions they will need to ramp up production. They can either raise additional debt and increase the chances of bankruptcy or they can raise equity and dilute current shareholders. My guess is that they will have to raise equity in the future, and dilute shareholders so that they can build out their capacity. Definitely a negative for holding the stock.
While I believe this is a great and innovative company, the stock price is overly optimistic at this point. The market is not taking into account potential supplier issues, production short-falls, and massive capital requirements. Its certainly possible for all of these issues to be resolved, but not in the time frame that consumers are hoping for.
(I do not hold any positions in Tesla stock)