Opinion: Why It’s Crunch Time for Tesla Motors (And This Year Will Be Its Hardest Yet)

Ever since a fresh-faced Tesla Motors began to make deliveries of its super-sexy two-seat Roadster back in 2008. there hasn’t been a week where we’ve heard some story or other about how it plans to change the world. And from its IPO in 2010 through to its first Model S delivery in 2012, its first Model X delivery last year, and the way in which it has helped to revolutionize everything from car purchasing to servicing, updates and connectivity, Tesla has managed to do just that.

But with Tesla Motors due to release its final Q4 report this coming Wednesday and Tesla CEO Elon Musk hinting that the long-awaited Tesla Model 3 reveal may be of pictures rather than a finished car, Wall Street is starting to get itchy about the trendy automaker.

Tesla has an incredibly hard year ahead of it.

Tesla has an incredibly hard year ahead of it.

Those fears, combined with a general sag in the market that has nothing to do with Tesla and everything to do with fears of another global recession caused by falling oil prices, has meant that Tesla Motors [NASDAQ:TSLA] stock has fallen to its lowest price in more than two years, dropping to a low-point in afternoon trading of just $146 per share. For those who have been keeping track, that’s nearly a half of what Tesla’s stock was at its peak in July last year, and more than 38 percent less than it was at the end of December last year.

This falling stock price, combined with the engineering challenges of juggling multiple projects and the first serious competitors to Tesla’s electric vehicle crown just around the corner, makes 2016 the sink or swim year for Tesla.

Tesla Energy products are now being made, but not in high volumes (yet).

Tesla Energy products are now being made, but not in high volumes (yet).

Financials first. While Wall Street always gets a little jittery around Tesla’s earnings call, this particular earnings call carries some extra challenges for Tesla. First of all, Q4 2015 will be the first full quarter in which the Tesla Model X has been produced and delivered. Massively expensive for Tesla to develop thanks to delays which we now know were caused in part by a parts supplier failing to meet Tesla’s engineering standards, investors will want to see that Tesla is earning back some of the money it spent on the Model X to date.

Ideally, investors want to see large numbers of Model X cars rolling off the production line, yet as of the end of December Tesla was averaging around 250 Model X cars per week. That means at best, only a few thousand Model X cars will have been delivered during Q4. Worse still, although the Tesla Model X is undoubtedly a halo car for Tesla, its complexity, cost, and price make it a car that is unlikely to sell in the kind of high volumes that the Model S does.

That means Tesla will have a longer wait before its investment pays off.

It’s not all the Model X. Last year, Tesla spent billions on its Gigafactory in Reno, Nevada. Due to start producing battery cells this year with the aim of being at full-scale production next year, the Gigafactory is another big investment which has yet to pay Tesla back. Moreover, with Tesla’s Powerwall products in high demand, Tesla had to double-down on the Gigafactory last year, expanding the facility far beyond its original plans in order to meet future Tesla Energy and electric car battery demand. And that, as you’ve probably guessed, means more investment.

Next we have Powerwall and its commercial sibling, Powerpack. Although Q4 will be the first quarter in which Tesla Energy products have been shipped, restrictions in lithium-ion cell availability (due to the Gigafactory not yet being in full production) means that Tesla has only been producing a fraction of the Tesla Energy products it will in a few short years. With demand high but supply restricted, Tesla’s bottom line for Q4 2015 won’t show a huge income from Tesla Energy. At least, it won’t be large enough to lessen Tesla’s losses from Q3.

Perhaps the biggest challenge though lies in the Tesla Model 3. With Elon Musk coy about what we’ll actually see of the Model 3 next month — and some suggesting all we’ll see is a rendering, photographs or mock up model of the next-generation electric car — investors are starting to worry about Tesla’s ability to bring the Model 3 to market on time and on budget.

The Gigafactory is a big investment that hasn't payed off yet, too.

The Gigafactory is a big investment that hasn’t payed off yet, too.

Those fears are well-founded too: so far, not a single one of Tesla’s electric cars have arrived on time. But in order to keep Tesla’s customers and Tesla’s investors happy, the Model 3 is the car which must deliver.

Why? Competition.

The Tesla Roadster, Tesla Model S and Tesla Model X all entered their respective marketplaces as the first of their kind. Before each vehicle, there were no comparable electric vehicles on sale. But by 2018, when the Tesla Model 3 is generally accepted to enter the market, the Tesla Model 3 will be entering a marketplace already occupied by the Chevrolet Bolt EV and the next-generation Nissan LEAF. Both are expected to have real-world ranges of around 200 miles per charge, and both are expected to sell for a similar price to the Model 3.

While Tesla’s Supercharger network may still give the Model 3 an edge over the competition, it won’t be as clear-cut as it was with previous Tesla vehicles. Moreover, with Audi and other luxury brands planning their own long-range electric cars, Tesla will have to work far harder to keep its customers than it does today.

In order to give it the best fighting chance against its upcoming rivals and keep the money flowing, 2016 will need to be an exceptional year for Tesla. The Model 3 launch will have to be on target. It will need to ensure that Model S and Model X sales continue to rise, while continuing to drive down production costs. And while the lure will be there for Tesla to continually develop its autopilot features in order to make Tesla electric cars the most advanced semi-autonomous cars on the road today, Tesla will have to dance the fine line between investing in keeping its current customers happy with new features and investing in its future.

In short, 2015 was a tough year for Tesla. Its losses widened, driven by massive investment on multiple projects.

Those doors are awesome -- but they were costly to develop.

Those doors are awesome — but they were costly to develop.

Last week, Musk exercised his right to buy $100 million in Tesla stock options, giving him a one-fifth shareholding in the company in a move that many analysts saw as the CEO showing his belief in the company and its future.

But that hasn’t stopped the stock from falling. And it won’t stop what many predict will be widening losses. Things will likely get worse before they get better.

But that’s the thing. Tesla has hit hard times before. In fact, there have been several times in the company’s history where funds were running dry, times where Musk had to write personal cheques to keep the company going. On each occasion, the company bounced back stronger and more capable than it did the previous time.

And if there’s one company that can get through this year despite the odds, it’s going to be Tesla.


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  • LOL … “investors are starting to worry about Tesla’s ability to bring the Model 3 to market on time and on budget.”

    I’m sure these same investors were panicking when dual-drive models and the 70/90 kWh models upgrades were delayed … or the software upgrade with the summon was delayed. Like many high tech companies, Tesla doesn’t do deadlines, instead the focus is on creating a creating level of customer experience.

    Note with Model Ξ, Tesla (aka Elon) has already stated the initial model(s) will be a no-frills edition. Can’t wait to read initial reviews comparing Model S & Ξ feature by feature … “but the Ξ doesn’t do 0-60 mph in ___”. ( sarcasm )

  • Michael Thwaite

    Nice piece, thanks. I suspect that scale will be on Tesla’s side in the long term. Today their car sales make up a tiny fraction of the market as a whole – it’s such a big market, I doubt that there won’t be room for everyone and, with their niche being EV only, they’ll still corner that market, even in a world of e-trons, Leaves et. al.

    (disclaimer: I do own Tesla stock)

    • coldspring22 .

      Nissan and GM are first movers in mass ev market, and it looks like they have the scale on their side. If Tesla is struggling to make profit selling $100K cars, how will they make profit on $30K cars? Nissan and GM will always dominate mass ev market, which is far more important than luxury niche in revolutionizing transportation.

      • Michael Thwaite

        I don’t see them struggling to make profits on the S & X but make profits on the car sales plus growth investments together. In a steady state, I can’t see them disappearing. Nor can I concede automatic domination of the market by Nissan and GM. I listen to a number of voices in the traditional industry exclaim that there’s no way that Tesla can succeed without massive investment and, they’ve been saying that for 7 or 8 years now. Even if it became a war of attrition between Tesla and the established makers, I can still see hopeful investors fueling the fight from Tesla’s side.

        I suspect the only way they’d go out would be through an acquisition.

  • CDspeed

    I think the Model 3 will be more then pictures as rumors have suggested. If you look at Tesla’s previous launches they’ve done a really good job of presenting drivable concept cars.

    • Chris O

      I would like to believe that Tesla will show a working concept car but this is what Tesla’s spokesperson Ms Brooklyn had to say about this yesterday:

      “The Model 3 is on time, and everyone is going to learn more about it at
      the end of March. That’s when we’ve committed to talking about it and
      giving a really great update, and that’s what we’re going to do.”

      Couldn’t help noticing that words like “unveiling” and “concept car” are noticeably absent from this communication. I wonder if it would be still legal for Tesla to come up with a working prototype at this point after all the innuendo suggesting differently that has not failed to have a serious effect on stock prices.

      • CDspeed

        Well, only time will tell.

  • Chris

    I don’t think any year will be as difficult as when they were struggling to produce the original roadster with customers threatening to pull their deposits.

    Losing money now while investing heavily in superchargers and the gigafactory will bring them only benefits in the longer term.

  • Nico

    I could not have write this bether. You know all about the history same like me. Another effect could be the bad customer reports in which I think some are manipulated by the rivals. Maybe the rivals buy even Teslas for bad voting. But there is also the fact that in actual versions some parts have lower quality and some customers need to go more often to the service center to change parts. All because of mass production? I hope they can manage to fix it.

  • Chris O

    Model 3 is Tesla’s pay day basically so I do think it’s not good that the botched Model X introduction has eroded investor’s trust in Tesla’s capability to deliver the goods on time and within budget. Not too worried about the head start rivals like GM and Nissan have as their products don’t come with compelling quick charge support and Bolt isn’t even capable of serious quick charging making it a pretty uninspired product.

    Until that pay day comes there will be pretty losses of course as Model S and X revenues can’t pay for all the investments needed for Model 3 but that can hardly be a disappointment for serious investors could it?