Wait, Tesla's Model 3 Numbers Don't Matter?

Analysts are eagerly awaiting what Tesla (TSLA) may say this coming Tuesday, July 3r, about the pace of production of its Model 3 sedan, which CEO Elon Musk has promised would hit a rate of 5,000 units made per week by the end of this month.


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But not everyone is interested: Pierre Ferragu with New Street Research, who has a Buy rating on Tesla stock, writes today that he has received " incessant calls from journalists and investors." But, he declares, "we don't care much" about the numbers.

His indifference comes amid more negative speculation: Salvador Rodriguez with Reuterslate yesterday warned that employees are predicting Tesla will miss the 5,000-per-week target, citing comments to Reuters by three unnamed line workers.

Ferragu makes a gesture to the estimates. He writes that he models a "run-rate exiting the quarter to be between 3,500 and 5,000" units per week of Model 3, with total quarterly production of 25,000 or higher, which would be "fantastic," in his words.

But it doesn't really matter. "Whether the company hits 5,000 units per week now, or later this year has virtually no incidence on the future of the company, he writes. "This is the reverse principle of the Lorenz butterfly. Today's production run rate has virtually zero predictive power to units produced next year."

Ferragu chides investors for "falling into the trap of looking for their keys where there is light, instead of where they might have lost them," by chasing production numbers.

Rather than tracking assiduously the production rate, advises Ferragu, "a very rough tracking makes sense," as the real point is whether "Tesla is showing good progress" with Model 3, not the exact number.

The crux of his argument is that improvement, even if it falls short of the 5,000 target, will still boost free cash flowfor Tesla:

If our analysis summarized on the LHS of this slide is right, with 27k Model 3's sold in 2Q18, Tesla would have sold ~19k more units than in 1Q18, boosting FCF by $320-560m. That would put 2Q18 FCF at -$450m vs. consensus at -$850m. Obviously, multiple other moving parts will affect FCF in the quarter, and the key in August will be to analyse reported numbers and understand if the contribution of the Model 3 goes along our expectations.

Tesla shares today are down $2.88, or 0.8%, at $347.05

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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