Going into electric-car maker Tesla's (TSLA 0.88%) fourth-quarter earnings release, here's the biggest question: How many Model 3 vehicles will management say it expects to deliver during the year? After all, we already know Tesla has about 400,000 deposit-backed reservations for the $35,000 vehicles. But the big mystery is how Tesla's Model 3 production ramp-up will look -- and thus Model 3 deliveries.
While investors may not get a very specific answer, management's guidance range for total vehicle sales will likely provide some useful insight into Tesla's outlook for the highly anticipated, lower-cost vehicle.
Model 3. Image source: Tesla Motors.
Looking to guidance
If Tesla follows its usual practice, it will provide an outlook for expected full-year vehicle deliveries when it reports its fourth-quarter results on Feb. 22, but it won't break down this forecast by model. Still, investors can extrapolate from guidance for total deliveries to get an idea of what management might expect from Model 3.
Tesla CEO Elon Musk has long predicted it expects its late-2015 launched Model X to eventually rival Model S deliveries, bringing total Model S and Model X annual deliveries to about 100,000 units. With this context, any guidance beyond 100,000 units in 2017 could presumably represent expected Model 3 deliveries.
So, what sort of guidance range should investors expect from Tesla management? While this may not be the answer investors are hoping for, management will likely guide for a wide range of possible outcomes. There's simply significant uncertainty associated with forecasting a huge step change in vehicle manufacturing.
Musk explained the difficulty of forecasting Model 3 deliveries in the company's fourth-quarter earnings call:
Another thing I really want to emphasize is the production ramp tends to look like -- is exponential. Ultimately it is an S-curve. An exponential goes to linear then goes to log. And it's very difficult to predict exactly where that beginning part of the exponential and the S-curve fits in between quarterly reporting.
A shift of even a few weeks one way or the other can have quite a dramatic effect on what it looks like in that quarter, but that's not indicative of the future. So we're telling you what we -- we're giving you the best assessment we have short of having a crystal ball.
But Musk did provide some vision -- albeit very vague -- into Tesla's expectations for Model 3, saying he thinks it will be an "exciting 2017." Further, he said that Model 3 production will be very uncertain in Q3 but "gets pretty clear in Q4."
Why Tesla's guidance matters
Should investors even take Tesla's guidance seriously? I think so.
It's worth noting that, despite Tesla's well-documented tendency to miss targets, its recent misses are relatively small in relation to its rapidly growing targets. Even more, the percentage gap between Tesla's initial annual guidance in recent years and its actual deliveries isn't growing, despite extreme growth in its targets.
|
Year |
Initial Guidance |
Actual Vehicle Deliveries |
Difference |
|---|---|---|---|
|
2013 |
20,000 |
22,442 |
12.2% |
|
2014 |
35,000 |
31,655 |
(9.6%) |
|
2015 |
55,000 |
50,658 |
(7.9%) |
|
2016 |
80,000-90,000* |
76,230 |
(10.3%*) |
|
Total |
195,000 |
180,985 |
(7.2%) |
Asterisk indicates figure is calculated using a midpoint of a guidance range. Table by author.
Sure, there will likely be more uncertainty associated with Tesla's guidance for 2017 deliveries than in previous years given the guesswork even management will need to employ to predict Model 3 deliveries. But Tesla's history of small misses on big growth targets gives investors good reason to at least expect its guidance to reflect a likely trajectory for actual vehicle deliveries in 2017.
Wait! What about those Model X delays?
When forecasting Tesla's Model 3 production ramp-up in 2017 and beyond, it's probably tempting for investors to look to Tesla's Model X delays and production challenges as a forewarning for Model 3 production troubles. But there are several issues with this reasoning.
First, unlike the Model X, the Model 3 was designed from the ground up for high-volume production. Second, the Model X is an insanely complex vehicle, featuring never-before-manufactured features like falcon wing doors, self-presenting front doors, the largest front windshield in any vehicle, and monopost seats.
Further, the Model X is the first fully-electric SUV ever built. Indeed, it's arguably a borderline miracle that Tesla was even able to achieve an annualized production run rate of 40,000 Model X units by the end of 2016.
Model X. Image source: Author.
In Tesla's third-quarter earnings call last year, Musk specifically warned investors not to look to Model X as an example of how Model 3 production could turn out:
It's always tempting for people to reason by analogy instead of first principles. And that would be the mistake of assuming that anything to do with the X production has bearing on the Model 3.
They are very different programs with completely different approaches. So I would not try to extrapolate from that, any more than it would've made sense to extrapolate from the Roadster when we were making 600 cars a year, to 20,000 cars a year with the Model S.
...
If you were to extrapolate from the Roadster experience, you would be completely wrong about the Model S outcome, and many people were. That's why I would say X is not relevant.
Interestingly, for the first full calendar year of Model S deliveries, Tesla actually exceeded its initial guidance for 20,000 vehicles, delivering 22,500 units. While achieving the same sort of surprising outcome at Tesla's higher-volume production today won't be easy, management is clearly confident in a very steep production ramp-up for Model 3.
Tesla vehicle production. Image source: Author.
Another year of 50% growth?
I'll be expecting Tesla to provide a guidance range of approximately 110,000 to 130,000 units, representing about 50% year-over-year growth in deliveries and around 10,000 to 30,000 Model 3 deliveries. However, since Tesla is expecting its annualized production to increase from a run rate of 100,000 units today to an incredible 500,000 units in 2018, only 110,000 to 130,000 deliveries in 2017 would mean Tesla's first and second quarter of 2018 will need to be characterized by the steep portion of the S-curve.
But this is how S-curves look. First, they're gradual; then, they suddenly rise.
