Here's Why the Tesla Model 3 May Not Debut in 2017 (TSLA)
In 2016, Tesla Motors (ticker: TSLA) produced 83,922 electric vehicles, up 64 percent from the year before. But Elon Musk, modern-day Renaissance man and CEO of the electric car company, isn't satisfied with that rapid pace of growth.
Tesla aims to produce 500,000 electric vehicles in 2018. To do that, it will have to increase production capacity by 145 percent annually in 2017 and 2018.
But that's not even the most important aspect of the timeline for Tesla investors.
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The company has always said the first deliveries of the Tesla Model 3 -- the first mass-produced, affordable all-electric vehicle ever -- will come in late 2017. This launch timeline is an absolutely critical data point for TSLA stock investors, who are counting on the Model 3 to take the fledgling automaker from niche to mainstream.
While TSLA still maintains that goal, investors should be very skeptical.
Language. "Elon Musk is the master of manufacturing suspense that keeps him and Tesla in the media spotlight," says K C Ma, professor of finance at Stetson University.
Musk isn't just a marketing genius. He also happens to have genius-level skills in technology, physics, engineering and finance. But that's beside the point.
On Twitter ( TWTR), Musk is constantly creating "breaking news" by dropping production dates, teasing designs and announcing software updates, turning minor details that don't really matter into to free press.
So it always seems as if something new is happening at Tesla, when in reality the Model 3 -- essentially a make-or-break product -- doesn't even exist yet.
TSLA itself also uses slick language to creatively shift investor focus to metrics that aren't incredibly important.
Take production, for instance. As a customer, do you care that Tesla is making more cars this year? No -- you care when you get yours. And it looks like customers -- who've been waiting since Musk announced the Model 3 on his Twitter in 2014 -- may have to wait until 2018 for a car that has always been expected in 2017.
New Tesla Model 3 reservations definitely won't be delivered in 2017; in October, Tesla quietly updated its website to say that newly placed orders couldn't show up until mid-2018.
Slippery slopes like this one raise the possibility that future pushbacks could be made to the schedule as well.
A bad record. Tesla has a long history of embarrassingly long production delays. In fact, Tesla is 0-for-3: every model it's made has fallen far short of its initially promised production and delivery dates:
-- The Tesla Roadster was supposed to debut in mid-2007, but it took until the first quarter of 2008.
-- Two versions of the Model S were delayed for months due to supplier issues.
-- The Tesla Model X SUV was notoriously late by more than two full years due to insanely long production delays.
This tradition continued in 2016, as Tesla aimed for 80,000 deliveries but finished the year with 76,230, citing production delays as the reason for the shortfall.
So you're forgiven for doubting TSLA when it comes to the Model 3.
"They have stretched targets that they tend to miss. So if they target the second part of 2017 they will miss at least the early part of that, if production doesn't fall into 2018," says Efraim Levy, equity analyst for CFRA.
"I don't think they'll meet the goal of 500,000 vehicles in 2018, either," Levy says.
Leaked slide. In June 2015, a slide from a Tesla presentation was leaked, showing that the Model 3 was "planned for 2018." The company scrambled to clarify, saying that the slide referred to when the car would be at "full production."
It's still a little fishy that the company, which had always associated the year 2017 with the Model 3, would chose to reference 2018 in an internal slide.
From a marketing and stock price perspective, a 2018 debut of a car announced in 2014 simply wouldn't get too many people excited.
Less focus. After the controversial merger of Tesla and SolarCity Corp. ( SCTY), the company can now legally distract itself with things like solar panel production.
So TSLA has to juggle the management and production demands of two companies now -- just as it prepares to ramp up production to unprecedented levels and enter the auto industry big leagues with the likes of General Motors Co. ( GM), Ford Motor Co. ( F), and Fiat Chrysler Automobiles NV ( FCAU).
Even without the distraction of solar panels, the Model 3 was going to be Tesla's toughest project yet, especially if there's a heavy focus on the self-driving aspect as expected.
"With automation you add a lot more cameras, you add radars and such, so it does increase the complexity of the supply chain," says Raj Rajkumar, Institute of Electrical and Electronics Engineers fellow and professor at Carnegie Mellon University.
That could be bad news for schedule sticklers.
Not only that, but TSLA has a history of getting distracted by other projects at the expense of release dates. Remember the two-year delay in the Model X? The main reason that happened was Tesla's focus on ramping up Model S production.
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"I personally do not expect the Model 3 to be released this year," Rajkumar says.
TSLA needs to keep investors waiting around. Now more than ever, any Tesla marketing that will keep TSLA stock owners waiting around (and of course, potentially attract new ones) is sorely needed. Why? Because the company is doing big things, and those big things need big financing.
Tesla has stated in SEC documents that it will need to procure additional financing to fund the massive scale-up needed for the Model 3. About 400,000 people placed $1,000 deposits to reserve a Model 3, triggering Musk to set the ambitious 500,000-per-year production goal by 2018.
Previously, Tesla aimed to make 500,000 cars a year by 2020.
While Musk claims the combined Tesla and SolarCity entity is the world's first vertically integrated sustainable energy company, many think the merger achieved another goal. Tesla is now one of the world's most efficient cash-hemorrhaging machines.
Prior to the merger, both companies were unprofitable, heavily indebted and cash flow negative. Double that, and you get the scenario.
Why does this mean Tesla needs to keep investors waiting? Because Tesla needs another capital raise, and if it can keep the TSLA stock price high, it'll have a much cheaper cost of capital.
The cynical view that Tesla may be misleading investors to keep its stock price high isn't, unfortunately, an original one. According to the Wall Street Journal, the SEC began investigating Tesla in mid-2016 to determine whether the company should've disclosed a fatal crash involving a driver using its Autopilot software to investors before a $2 billion stock offering.
Other risks remain for long-term investors. Even if Model 3 production goals are miraculously met, Tesla still has to sell them. And what's been marketed as the first mass-produced, affordable electric vehicle may not be that affordable after all.
"The Bolt is out there already and they get government subsidies, making the Model 3 less competitive," Levy says. On the other hand, "there will be a very limited number of Model 3 owners that will get the credits. They almost all won't."
This is a significant point, since the Model 3, set to retail for $35,000, is often referred to as a roughly $30,000 car -- but that's after factoring in $7,500 in federal tax credits. Those credits go away once a company has sold 200,000 vehicles in the U.S., a mark it should reach in 2017 or early 2018.
With Musk himself saying the average Model 3 selling price with options will be $42,000, we're talking a big difference from $30,000 or $27,500.
[See: 7 of the Best Stocks to Buy for 2017.]
There's nothing wrong with shooting for the moon. Just keep in mind Apollo 13 as you do.
John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.
