Though some of the theatrics that accompanied it weren't necessary, Tesla (TSLA) deserves credit for significantly ramping its Model 3 production over the last three months.
However, ramping production and ramping production profitably are two very different things. And Tesla, which is once again worth more than General Motors (GM) following its recent rally, still has some things to prove on the latter count. Particularly given some of the extraordinary measures Elon Musk's company took to achieve its Q2 Model 3 production goal.
In its Q2 deliveries report, released on Monday morning, Tesla disclosed that its produced 5,031 Model 3 units during the last 7 days of the quarter, ever so barely reaching a goal of making 5,000 units per week by quarter's end. The company also forecast it will reach a 6,000-vehicle production rate by late August.
Model 3 output over the quarter's last 7 days was up about 150% from the level it was at during the last 7 days of Q1. For the quarter, Tesla produced 28,578 Model 3 units, up from just 9,766 in Q1. With a whopping 11,166 Model 3 units in transit at quarter's end, Q2 Model 3 deliveries came in at 18,440. That's up sharply from a Q1 level of 8,180, but below a consensus estimate of 23,000.
Tesla also disclosed that it had roughly 420,000 Model 3 net reservations at the end of Q2. That's down from the 450,000-plus net reservations it had at the end of Q1, but perhaps better than feared given all of the production delays and target push-outs Tesla has seen since its July 2017 unveiling of the Model 3, which was once forecast to get to a 5,000-vehicle weekly production rate by the end of last year.
Regardless of how one feels about his attacks on perceived critics in the media, on Wall Street and elsewhere, the speed at which Tesla managed to ramp Model 3 output since Musk assumed responsibility for the sedan's production from engineering SVP Doug Field (just confirmed by Tesla to have left the company) in early spring is impressive. While the company still has a giant reservation backlog to contend with, it's hard to deny that real progress was made from April through June.
Nonetheless, for all the positives in the Q2 deliveries report, there's an important Model 3-related stat that we're unlikely to get until the arrival of Tesla's Q2 earnings report: The vehicle's quarterly gross margin (GM), which Tesla previously forecast would be "close to breakeven" in Q2 before being "highly positive" in Q3 and Q4 and nearing 20% by year's end.
Tesla has already backtracked from a forecast that it would achieve a 25% Model 3 GM once it got to a 5,000-vehicle-per-week production rate, and has cautioned that its decision to pare back the use of assembly-line robots in favor of humans would pressure its Model 3 GM in the near-term. Some of the eye-popping moves that Tesla carried out to reach its 5,000-vehicle-per-week target have also likely taken a toll. These include producing cars 24/7, creating a new assembly line (known as GA4) inside of a massive tent and flying in battery-production equipment from Europe.
Such moves could continue impacting the Model 3's GM in Q3. As could (in line with Tesla's prior commentary) tariffs and higher commodity costs. Tesla, which recently carried out layoffs as part of its attempts to avoid a fresh capital raise, did use its deliveries report to affirm prior guidance that it will be GAAP profitable and cash-flow positive in Q3 and Q4, but didn't say anything about its prior margin outlook.
In addition, even if Tesla manages to hit its second-half Model 3 GM targets in spite of the aforementioned issues, that doesn't provide clarity on what margins will look like for the $35,000 Standard version of the car, which isn't expected to see deliveries start until early 2019. In May, Musk declared that Tesla would "lose money and die" if it began producing the Standard version of the Model 3 right away.
Simply put, we're still a few weeks away from getting a full picture of how Tesla's Model 3 ramp went last quarter from a financial standpoint, and what it signals for the EV maker's attempts to become cash-flow positive and avoid a capital raise. And we might be more than six months away from knowing what the company's Model 3 margin profile will look like when there's a substantial number of $35,000 cars included in the sales mix.