Tesla Model 3: Boon or Curse for Tesla Stock in 2017?

Tesla StockWhere Is Tesla Stock Heading in 2017?

There’s never a quiet day at Tesla. The brain behind this revolutionary company is forever busy brewing up disruptive ideas. New developments at the company should get you excited if you hold Tesla stock in 2017.

I’ve always maintained that Tesla Inc (NASDAQ:TSLA) is no ordinary company. Its futuristic initiatives make Tesla stock a unique investment; an investment in and for the future.

As an investor, you can be sure of winning this hand because you hold the best kicker in the game, Elon Musk. The Tesla CEO is getting his hands dirty in nearly every revolutionary initiative that you can think of. He dreams it, he achieves it.

Let me give you an idea.

Musk dreams of a world where people can hop on rockets and take trips to the moon, a world where human thoughts can be downloaded on a computer, where houses are made of energy-storing roof tiles, where people drive cars that can run without gas.

Science fiction, you say? What if I told you this man has already founded at least one company for each of these dreams and is nearly halfway to achieving them?

Tesla and SolarCity Corp (NASDAQ:SCTY) are not Musk’s only claims to fame. From launching rockets into space (SpaceX), and now merging the human brain with computers (Neuralink), Musk is venturing into uncharted territories.

But why all the fanboying, you ask? Because to gauge the company’s wild targets, we have to first understand the wild brain behind it.

Musk’s acquisition of SolarCity was no coincidence. It was part of the grand scheme of things at Tesla. If you’re paying attention, now is the right time to own TSLA stock.

Musk wants to create a sustainable ecosystem based on green energy. For that, he has laid down two stepping stones in two of the biggest sectors of the economy: energy storage and transportation.

So, our utilities are going green with Tesla’s “Powerwall” and our rides are going green with Tesla’s electric vehicles (EVs). Supporting this ecosystem are Tesla’s free charging stations spread all over the country.

Simply put, Tesla is getting the infrastructure in place. But, for this ecosystem to thrive, people need to buy Musk’s ideas; in other words, mass adoption!

And this is where the “Model 3” comes in.

Tesla Model 3: Why the Hype?

Between the juggernaut of German luxury cars and Japanese affordable cars, finding a way into the mainstream automotive industry was virtually impossible. So Musk had to look for a niche.

He had to find a small group of people with both influence and money to adopt his idea; in other words, the rich. He knew that once he had them in his pocket, the mass market would follow.

Tesla’s first launch was a luxury sports car—the “Roadster,” which became all the rage. It was like owning a “Rolex” or a pair of “Louboutins”—a luxury fashion item with a cult following.

From there began Tesla’s rise. Those who could afford it were seen flaunting their new Teslas. The rest were awestruck.

This top-down approach had worked!

The next step was to take the idea to the mainstream, where the middle class could welcome this new automaker. TSLA stock was ready to pounce at the bears!

Unlike any of Tesla’s previous cars, the cheaper Model 3 holds this special significance. It is the this car that is going to take Tesla to the mass market.

Being a cheaper and smaller iteration of the “Model S,” the Model 3 is presumably expected to outnumber the former Model S and “Model X” in sales.

It makes sense.

The basic version of the Tesla Model 3 is priced at $35,000, less than half of a basic Model S or Model X.

In other words, this car is expected to be the most popular of all Tesla cars for garnering mass appeal.

Speaking in terms of numbers, Tesla currently manages to produce about 2,000 Model S and Model X vehicles in a week. With the Model 3 on the block, Musk wants to hit 5,000 units/week by the end of this year and 10,000 units/week by the end of 2018.

Those numbers are the reason why the market is raving about the Model 3. Musk has set some very high Model 3 production targets. This has, once again, pitched the bears against Tesla bulls.

Tesla Model 3: Pros vs. Cons for Tesla Stock

If Model 3 sales live up to expectations, it could prove to be a boon to Tesla stock for one major reason.

With the Model 3, Tesla will be able to cut down its manufacturing overhead and achieve broader economies of scale.

Doesn’t make sense? Let me explain. If you’re paying $100 in fixed costs every month to run your factory and are selling 100 units of your product, every unit is costing you $1.00 in fixed costs.

Now, if you start selling 200 units every month, the same unit will be costing you only $0.50 in fixed costs.

It is simple. The more cars Tesla sells, the more it saves on overhead costs.

For a capital-intensive business like auto manufacturing, overheads or fixed costs are a big burden.

Now, the Tesla CEO tweeted this week to clarify that the Model 3 is not a new installment of Tesla cars. It’s just a cheaper and smaller version of Model S with fewer features.

Tesla model 3

This means very few changes to the current assembly line will be needed to get the Model 3 up and running. Take note that the vehicle is rumored to have already received 400,000 reservations.

On the flipside of the coin are two cons.

First, Tesla has a history of delay in deliveries. Musk has not given a concrete delivery date, but has promised to begin the first deliveries by the end of this year. The general market perception is that deliveries of the the most basic Model 3 will be pushed to 2018. Now that could hurt TSLA stock in 2017.

The second big concern is the massive load that will fall on Tesla’s “Supercharger” network after the Model 3 hits the market. With hundreds of thousands of new Tesla vehicles on the road, the free charging stations will get overcrowded and cause inconvenience. Bad reviews and bad press are never good for a company.

How Tesla addresses these two concerns will set the tone for TSLA stock in 2017. So far the stock performance has been exceptional. Tesla stock is up an impressive 26% since the beginning of 2017.

tsla stock chart

Chart courtesy of StockCharts.com

Model 3 vs. Competition

Luxury hybrids from Mercedes (“S Class”) and BMW (“3 Series”) are often touted as Tesla’s biggest competitors when, in fact, they are not. Hybrids are not EVs.

You can’t compare apples with oranges.

In reality, Tesla’s biggest competition is Tesla itself. Musk may have found some wisdom in Steve Jobs’s words; “If you don’t cannibalize yourself, someone else will.”

Pay attention to how the Tesla chief, very tactfully, discontinued the cheapest versions of the Model S right before the Model 3 launch this year.

Putting it in Musk’s words, the cheaper, more affordable “Model S 60” and “60D” versions with smaller batteries are being discontinued to “simplify the ordering process for our customers.” (Source: “Tesla is discontinuing its least expensive Model S with 60 kWh battery pack next month,” Electrek, March 17, 2017.)

But, to be fair, we can’t take future competition out of the picture.

To say that Mercedes or BMW can’t replicate (or beat) Tesla’s technology is ludicrous. The reality is that these established heavyweights have already tested the waters and have headed back to the shore. To them, an all-electric vehicle doesn’t make economic sense.

But Tesla is not a conventional corporation. The Tesla chief is not working purely to make money (while that could be one motivation), but to achieve his dream of a green future, when all forms transportation will be electric.

This is why I don’t see competition to be a threat to Tesla. The sooner the competitors switch their focus to all-electric vehicles, the faster EVs will see mass adoption.

The day Mercedes and BMW see more money in EVs will be the day when demand for EVs will outweigh internal combustion engine (ICE) cars.

And that, my dear reader, will be the day Musk will get to live out his dream.

Competition is a blessing in disguise for Tesla.

Bottom Line on Tesla Stock in 2017

Tesla stock bears often call out the bulls on the lack of profitability. It’s true that Tesla currently has a bottom line printed in red ink. But so did Amazon.com, Inc. (NASDAQ:AMZN) for a decade. The e-commerce behemoth survived years of losses. Today it is an invincible tech giant and has returned to profitability. How? Two words: Jeff Bezos!

Those who stuck with Amazon had invested in the brain behind the company. As a TSLA stock holder, you would be doing the same.

By the way, Bezos and Musk may have a lot more in common than you think; both have been called crazy at one point and both are now flying rockets in space.

In a nutshell, 2017 may turn out to be a great year for Tesla. All the company has to do is ramp up production ahead of the Model 3 launch and make good on the delivery promise. I don’t see why that would be a problem, now that the company has raised nearly $1.2 billion in new debt and equity offerings.

In short, Tesla stock’s performance in 2017 is hinging on the Model 3. Whether it turns out to be a game changer or a complete bust for TSLA stock remains to be seen.

I’m waiting to see which way the wind blows before setting sail.