Tesla Model 3 Ramp: 5,000 To 10,000

Investment Thesis

Tesla (TSLA) moves at the exponential pace of innovation, which means most observers who think linearly will overestimate its growth in the near term and underestimate its potential in the longer term. In this article, I use Model 3 production ramp to illustrate this point.

Ramp, Part Un

Tesla started the Model 3 production ramp in July of 2017, and on July 28, it delivered the first 30 cars to employees at its Handover Event.

Since then, the stock price has been stuck in a trading range as the company struggled to ramp Model 3 production as was predicted by management and expected by investors:

Chart
TSLA data by YCharts

Sometime in the next 72 hours, the company will release its Q4 2017 Vehicle Deliveries and Production report. We will all soon see if Model 3 production ramp resembles that of Model S (relatively on-time which led to a major short squeeze in 2013) or Model X (marred by uncertainty that led to large stock price volatility in early 2016).

As I explained to Tesla Forum members in Model 3 Forecast Update, my Base case expectation is for the company to stick to its revised guidance of 5,000 units per week by March. I also provided an Optimistic scenario, which is supported by several observations, as well as a Conservative scenario for 2018 through 2025.

If my Base scenario expectation plays out, Tesla will have gone from zero to 5,000 units per week in eight months at a cost of more than $2 billion in CapEx, which was needed to build out the company’s Gigafactory and the Model 3 assembly line at Fremont; in other words, going from Zero to One.

Ramp, Part Deux

Many sell-side analysts expect the company to take even longer to go from 5,000 per week to 10,000 per week. For example, even Gene Munster, who has deemed Tesla the best bet in large cap tech, does not expect weekly Model 3 production rate to reach 10,000 until the end of 2021. This forecast, in my opinion, is unreasonably conservative.

Let’s quickly review the relevant management commentary from the previous earnings calls:

What people should absolutely have zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year.

I note that the above comment was provided before the battery module production bottleneck surfaced in 3Q17; nevertheless, it is an important data point, which shows what is possible if in fact Model 3 production ramp soon accelerates, as I discussed in my recent article Is Tesla’s Model 3 Back On Track?

In addition:

It’s worth noting that some of our manufacturing areas we’re actually seeing capabilities that we estimate in the 6,000 unit to 7,000 unit per week capability, well in excess of the 5,000 unit capability and we’re optimistic with further optimization that many of our production processes will meet very little and in some cases no, so I’m not saying no, but almost no CapEx to reach something close to 10,000 units a week.

It will have cost Tesla more than $2 billion in capital expenditures to ramp Model 3 production from zero to 5,000 units per week, but the subsequent round will likely cost a lot less. How much less? Check this out:

But I would say it’s going from 5,000 to 10,000 is probably – this is a total wild-ass guess, so right way to think about, but it’s like somewhere between 50% to 70% of the cost of the 5,000 line.

In other words, it may cost Tesla as low as $1 Billion to ramp from 5,000 units to 10,000 units per week. This is a significant observation, as Tesla’s growth was limited by capital availability until 2017.

Readers should note, however, that, as I discussed in Tesla Q3 2017: Revising My Projections, I expect Tesla to turn GAAP profitable at some point in the middle of 2018, potentially further allowing the company to accelerate its growth rate.

Bottom Line

Analysts both on the bull and bear sides of the isle may be vastly overestimating how long it will take Tesla to go from 5,000 to 10,000 weekly Model 3 production rate. My Base scenario assumes Tesla will achieve this second part of the ramp by the end of 2018, despite the short-term hiccups in the first half of the production ramp.

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Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Money Managers' Meaningful 2018 Stock Picks

Today is the best year of the day so far for stocks – and the stock market is not even open! But, since it’s the only day so far, we thought we’d scan the web to see if we might find any potentially meaningful stock investment ideas. Since stock stories number in the gazillions, let’s clarify what we mean by “meaningful:”

Numerous stock market stories, including – actually especially – those quoting big-name money managers, don’t mention any stocks.

This story fresh out from Money gathers the thoughts of a very distinguished panel, including Rob Arnott (Research Affiliates), Sarah Ketterer (Causeway Capital), Jim Paulsen (Leuthold Group), Liz Ann Sonders (Charles Schwab), and Floyd Tyler (Preserver Partners), and contains some interesting analysis – but there is no mention of any individual securities for those who care about those details. Another example of the no-stocks-named genre can be found in the U.K.’s Telegraph, which interviews several British money managers on broad investing themes as the new year commences.

There are lots of potential reasons for this. The interviewees could be concerned about lead time – perhaps the interview was conducted long before its planned publication, and the managers didn’t want to name names that seemed good to them, say, two weeks ago, but which might not hold up in the new year’s rapidly changing markets.

Going on record is another factor – many big firms particularly don’t allow their managers to name names that can adversely reflect on their firms if the stock doesn’t do well. Other firms may take the view that their stock ideas are for paying clients only, and others may be concerned with regulatory compliance. Whatever the reason, famous money managers are quieter today than in years past.

Our search found the most stock mentions coming from publications based in India. This article from Luxura Leader, for example, names five stock picks from JP Morgan analysts thought most likely to outperform in 2018 as a result of trends in artificial intelligence. However, some further checking indicated that the client note containing these stock picks was referenced in other publications as much as one month earlier, so although the ideas are meant to have a yearlong shelf life, the ideas are less than fresh.

Then again, even fresh analyst ideas have their foes. Seeking Alpha contributor Jeff Miller had this to say in his own just-out analysis of markets in the new year:

Analyst stock ratings. Citigroup (NYSE:C) was fined my FINRA for sending false stock ratings to retail customers. Buy instead of Sell, for example. And vice-versa. The fine was $11.5 million. Wow! For the record, in my “Great Stocks” program I use analyst ratings as a contrary indicator, buying Apple (AAPL) when it was hated and selling when CNBC could not find a negative analyst to feature.”

So was our search for fresh, out-of-the gate yet meaningful stock investing ideas fruitless? It was not – thanks to a Reuters story we found that names names which were themselves presented by genuine names in the investment management business.

Reuters reporter David Randall sought the opinion three small-cap money managers that achieved market-beating performance in 2017, a year in which many managers brought in absolute performance but fewer stood out in relative performance; (of course, every year has relative outperformers – the point is that in a year as strong as 2017 absolute performance alone doesn’t make the cut).

Those managers included Kenneth Korngiebel (Wasatch Micro Cap); John Slavik (Loomis Sayles Small/Midcap Growth); and Stephen DeNichilo (Federated Kaufmann Small Cap).

Their picks? Well, not quite yet.

Managers with a record of performance is meaningful; naming names rather than just themes – that too is meaningful. But talking your book doesn’t strike us as meaningful. The book may be great and the stocks may ultimately do well, but there is an inherent bias towards believing in what you already own. We’re more impressed therefore with new acquisitions or adding to existing positions. Only two of the above-named managers did that in the Reuters story, and that is therefore what we will quote:

Korngiebel is adding to stocks like Japanese outsourcing company UT Group Co Ltd, whose shares are up 243 percent for the year to date, and which he expects to grow its revenue by more than 30 percent in the year ahead. He is also adding to his position in U.S.-based Tabula Rasa Healthcare Inc, which helps doctors screen for potential drug interactions. Shares of the company are up 97 percent in 2017.

The percentage of the population who take five or more medication is going up and adverse drug events are expensive and can lead to loss of life. What we see here is opportunity to take advantage of an under-covered company that is unique and meets a large need,” he said.

And again:

Stephen DeNichilo, a portfolio manager of the $872 million Federated Kaufmann Small Cap fund, the 9th best small-cap fund this year….has a larger position overall in biotech companies, which have greater growth potential, he said. He has been adding to his position in Nektar Therapeutics, which is developing in abuse-proof opioid medication, and gene-therapy drug maker Spark Therapeutics Inc.

He also added a position in retailer Floor & Decor Holdings Inc shortly after its initial public offering in April as a play on consumer spending on home renovation.

You can evaluate yourself whether these ideas have merit, but they do seem meaningful, and worth watching in the new year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.