Here's a dose of reality about Tesla's heavily hyped mass-market Model 3 electric car: The company hasn't yet finalized the design for the Model 3, hasn't selected its parts suppliers, isn't sure it can produce and deliver the car in volume and on time, and still needs to do "extensive testing" to make sure the car can meet quality standards and government regulations.
If Tesla Motors can't resolve any or all of these issues, the company will be in trouble. Specifically, its "brand, business, prospects, financial condition and operating results could be materially damaged."
These warnings don't come from a disgruntled onlooker, but from the one source immune to Tesla hype: its own financial reporting to the Securities and Exchange Commission. The company's latest quarterly report, issued Tuesday, bristles with risk disclosures that provide a counterweight of realism to the breathless claims the company makes when it doesn't have to swear to them.
For instance, in a first-quarter "update" issued to customers and shareholders on May 4, Tesla reported having received more than 325,000 deposits for the Model 3 at $1,000 each. Based on the projected retail price of $35,000 plus add-ons, this implied $14 billion in future sales, "making the Model 3 introduction the biggest consumer product launch ever."
Tuesday's quarterly report, however, reminds shareholders that the Model 3 doesn't yet exist in final form and hasn't, in fact, been launched. Until at least late 2017, the earliest date when the cars can start coming off the production line, the model is subject to "unanticipated deviations from the expected price point, vehicle features or performance characteristics." Translation: The Model 3 might cost more than $35,000 and not quite deliver the acceleration or driving range claimed at the March 31 announcement event.
The car may not make the delivery deadline, either: "We may experience delays in realizing our projected timelines and cost and volume targets for the production, launch and ramp of our Model 3 vehicle," the company says. And since customer deposits are fully refundable prior to sale, demand for the car could be a lot softer than it looks.
Tesla's legions of fans undoubtedly will point out that almost every company's SEC reports include risk disclosures, and for the most part, they're boilerplate. That's true as far as it goes, but Tesla isn't just any company. It's a highly speculative play that hasn't racked up a significant performance history, and it has lost money every year. Indeed, Tuesday's filing reported a loss of $282.3 million for the three months ended March 31, up from a loss of $154.2 million for the same period last year.
Tesla's risk disclosures need to be taken seriously because they reflect the company's manufacturing experience. Its earlier luxury models, the Model S and Model X, suffered long production delays and have been beleaguered by recalls.
The quarterly report's warnings about the challenges Tesla faces with the Model 3 stand in sharp contrast to company founder Elon Musk's announcement a week ago that the company is advancing its timetable to build 500,000 cars a year to 2018, two years earlier than scheduled. Which should you believe — the hype Musk delivers to fans, or the sober reality he addresses to government regulators? Easy choice.
Although Tesla Motors looks like an engineering and manufacturing company from the outside, as a stock issuer, it has been built on hoopla. Investors in such companies tend to take their founders' promises on faith, though they also can be fickle. That's been the case with Tesla and Musk, its lionized founder. Doses of reality need to be delivered regularly, even if they're often shunned.
The most recent round of hoopla began with the announcement of the mass market-priced Model 3 on March 31. Within a week, investors had bid up the company shares to $265.42. The stock subsequently slumped by more than 20%, but as of this writing, it's up for the day by $5.60, or 2.68%, to $214.29 (but the trading day is still young).
Musk announced on May 4 that Tesla would step up its production goals by two years to 500,000 cars by 2018. He acknowledged that that meant a 50% increase in capital expenditures over the previously forecast $1.5 billion. How long Musk will be able to continue Tesla's financial high-wire act — and whether he can keep at it long enough to deliver the Model 3 as promised —is anyone's guess. The question for investors is how long they want to be along for the ride.