SAN FRANCISCO -- Elon Musk promised a brisk ramp up as Tesla Inc. rolls out its most affordable electric car yet, but the model’s plodding start in its first quarter of production may actually be a blessing in disguise.
Tesla -- which made just 260 of the highly anticipated Model 3 sedans instead of the 1,500 forecast for the three months ended in September -- cited unspecified “bottlenecks” when reporting quarterly output Monday. Missing guidance by about 85 percent sends most companies’ shares into a tailspin, but Tesla stock rose nearly 2 percent on Tuesday.
That’s because Tesla’s slower-than-expected ramp may end up being best for the money-losing automaker, even if it signals a longer wait for Model 3 reservation holders. The company’s customers and investors may not like the bottleneck news now, but this is CEO Musk’s first step into mass production, and his company has to get it right.
“It’s the lesser of two evils,” Jamie Albertine, senior analyst at Consumer Edge Research LLC, said in a phone interview. “Do you risk investor sentiment and hurt the stock price today or disappoint customers with a recall tomorrow? A recall on the Model 3 could be catastrophic.”
Tesla shares closed up 1.9 percent to $348.14 in New York.
A successful roll-out of the Model 3 is vital for Tesla’s future. With a starting price of $35,000 before options or incentives, the car is designed to reach far more buyers than either the Model S sedan or Model X crossover, which attract luxury buyers. Tesla has disrupted the global auto industry with its stylish electric cars, but it now faces growing competition from the likes of Daimler AG, Volkswagen AG and General Motors Co., which are introducing EVs in droves and have much more cash to spend.
Musk has shown caution in making sure Tesla gets the Model 3 right by delivering the first cars to employees, a more forgiving audience.
“Let’s face that the Model 3 is actually sort of a beta test right now,” short-seller Jim Chanos, who’s betting against Tesla shares, said on Bloomberg Television last week. “Even though it has been released, it’s in the hands of employees and friends of the company.”
But that’s not necessarily a bad approach. The market would rather see the Model 3 produced well than have it rushed out quickly to meet delivery targets, said Morgan Stanley analyst Adam Jonas.
“Quality and attractiveness of early production is far more important than the quantity delivered -- at least for now,” Jonas wrote Tuesday in a note to clients. “Most auto launches have hiccups, and Tesla is no exception.”
Several holders of Tesla shares shrugged off the miss, with Ross Gerber, CEO of Gerber Kawasaki Wealth & Investment Management, noting that “Elon’s never made a number, ever.”
“Coming up short is what we expect of him,” he said.
Forgiving, for now
That said, investors won’t wait forever for Tesla to hit its stride. The Palo Alto, Calif.-based automaker had previously said that it would build 20,000 of the cars a month by December, and then 500,000 total vehicles a year in 2018. The company didn’t reaffirm or change that guidance Monday.
“Continued challenges in executing on the Model 3 ramp would be disastrous for the company given the competition that is expected for 2019 and beyond,” Jeffrey Osborne, an analyst at Cowen & Co., wrote in a report. He criticized the vagueness of Tesla’s disclosure about its manufacturing issues and said the company’s production goals for the end of the year are “at risk.”
Michael LaChapelle, a portfolio manager at FoxForge Capital, which has a short position in Tesla, said he’s surprised the market reaction has been so muted.
“Eight weeks ago, Tesla said they would make 1,500 cars in the quarter. For a car manufacturer to not make a number from eight weeks ago -- that’s crazy,” he said. “To me, it says that Elon is just guessing. If they can’t get from 30 to 1,500, how are they going to get to 500,000?”