Few companies have done a better job of defying gravity than Tesla, but the California-based battery-carmaker could see the bottom drop out, some observers are warning, when it rolls out third-quarter earnings shortly after the final bell sounds on the New York Stock Exchange on Wednesday.
Barring an unlikely surprise, Tesla is widely expected to miss its earnings forecast for the July to September quarter, reflecting a variety of setbacks, most notably including a serious shortfall in production of the new and much-anticipated Model 3 battery sedan. Tesla has also been forced to offer steep discounts and incentives on its older and more expensive models, the Model S sedan and Model X sport utility vehicle.gi
Long a Wall Street darling, Tesla still has a solid market capitalization, though it is no longer the most valuable of the U.S.-based automakers. And it could slip even more sharply, analysts warn, if there's more bad news about the Model 3 during an earnings conference call featuring Tesla founder and CEO Elon Musk.
"The Tesla Model 3 is a dud," declared Harris Kupperman, the president of hedge fund Praetorian Capital.
But while not everyone is ready to write off the new car — Tesla's first entry into the mainstream market — the sedan is clearly off to a bad start. During the first three months after its July launch Tesla produced just 260 Model 3 vehicles, less than 20 percent of its 1,500 target. That was far worse than expected, even though Musk had already warned of "production hell" at Tesla's Fremont, California assembly plant.
Plenty of automakers have seen new models get off to a bad start, only to turn around later. And Tesla claims to have somewhere north of 400,000 advance reservations for the Model 3 — so many that it wasn't expecting to satisfy the current order backlog until early 2019 even if everything went well. The problem is that things at the Fremont plant may not go well for a while.
The industry trade site the Daily Kanban is reporting that Tesla has continued having major problems with the customized assembly line developed specifically for the Model 3, in part because Tesla kept changing the line's design and layout and then didn't conduct the traditional, advanced testing before it was installed at the plant. Separately, the automotive trade magazine Ward's quoted a Tesla source who said, "I can't see them reaching 2,500 to 3,000 weekly until the end of next year." If true, that would mean Tesla will likely produce several 100,000 fewer of the sedans than promised in 2019.
Competition is heating up
A new report from automotive analysts at UBS warns, "competing EVs are coming, and a long delay could reduce (Tesla's) market share opportunity."
These include new offerings from Ford, Volkswagen, and others at the low end— along with high-line BEVs from the likes of Porsche, Audi, Mercedes-Benz, and others. There are reports that some potential Model 3 customers are already opting to switch to the well-reviewed Chevrolet Bolt EV which carries a similar price to the Tesla, while offering longer range. Nissan is also scoring with the second-generation Leaf EV which undercuts both Tesla and Chevy by thousands of dollars.
Also fraying the bottom line, Tesla has been finding that some buyers who might have opted for the more expensive Models S and X are waiting for the cheaper Model 3 sedan. To keep sales going for the premium products Tesla has been cutting prices — as much as $5,000 for the top-line Model S P100d. And that doesn't include additional sales incentives.
The Model X, in particular, remains a sore spot for Tesla. The battery-SUV was more than two years late to market in 2015 and continues to have serious quality issues. In its annual Automotive Reliability Survey released on October 19, influential Consumer Reports magazine declared that the Model X tied with the Cadillac Escalade as the most problem-plagued products on the U.S. automotive market. Tesla challenged the results but the non-profit publication has stood by its findings.
The turmoil at the Fremont plant has been compounded by recent mass firings. The company said it let hundreds of employees go from its motor division because of what it described as "performance issues." But the National Labor Relations Board is questioning that claim, spurred by complaints filed by the United Auto Workers Union. The UAW alleges that many of those fired were actively involved in an organizing drive.
Tesla previously came under fire from workers' rights advocates who cited data showing an unusually high rate of injuries at the plant. The automaker subsequently told NBC News earlier this year that it had taken steps to bring its safety record in line with the rest of the U.S. automotive industry.
Long the darling of Wall Street, Tesla still has its admirers, though a growing number of analysts have begun to issue "sell" advisories. That includes Zachs Equity Research and billionaire investor David Einhorn's Greenlight Capital.
Shares of TSLA reached an all-time high of $385.00 on September 18, giving Tesla a market capitalization well in excess of General Motors despite selling barely 1 percent as many vehicles and having run deficits in all but two quarters since the California automaker went public.