Tesla is preparing for its biggest year ever.
In the next six months, it will launch the $US35,000 Model 3 mass-market car, and, over the course of 2017, the investment community will find out whether Elon Musk’s company can live up to its new business model as a vertically integrated energy firm, after its 2016 acquisition of SolarCity for $US2 billion.
The stakes are high for the company and its $US40 billion market cap. On Wall Street, the bear case for Tesla indicated that its stock could plummet to $US50 from the current level of about $US250. The bull case suggests that $US500 per share could be in the cards.
Such a wide disparity has driven wild volatility in Tesla’s share price over the past two years. And to call it disparity really does investors a disservice. It’s actually disagreement over whether Tesla can be a successful sustainable-energy conglomerate or settle into a modest role as a provider of luxury electrified transportation.
This year will be critical to Tesla matching bullish expectations, or trimming itself back and witnessing the bear case take hold.
So there are two scenarios that could play out: best and worst.
The worst-case scenario
The bad news first.
Let’s explore what happens if everything goes wrong for Tesla in 2017.
The biggest risk is that the Model 3 launch is delayed. A delayed launch in and of itself wouldn’t be a signal that actual volume production of the Model 3 is at risk — Tesla could launch the car in 2018 and play catch-up at the factory — but it would be a sign that all the positive indications we’ve gotten so far about the timing of launch were misleading.
If the 3 is delayed, the next question is “for how long?” The Model X SUV arrived three years late. The Model 3 won’t be that late, but any significant lag — say, six months or more — would mean that Tesla would be forced to ask some percentage of the 373,000 preorder customers to wait. Tesla also wouldn’t be able to collect the revenue, which could add up to billions.
Two quarters of delays would mean awkward exchanges on earnings calls with Wall Street analysts. Musk and his team have already concluded that Wall Street doesn’t have much of a clue about what the company is all about, so the exchanges themselves would be less troubling than the negative research notes and downgrades to ratings and target prices that would push shares below $200 and damage Tesla’s ability to finance itself through capital raises, of either equity or convertible debt.
That situation could compel Tesla to further draw on its lines of credit. There’s no point in sitting on the money when you’re trying to change the world, but it’s worth remembering that Tesla has added $3 billion in SolarCity debt to its balance sheet — debt that will need to be serviced.
What we can see is a cascade of terrible stuff that would undermine Tesla’s relatively monumental ambitions. Given the now debt-laden balance sheet, it could put the company under a certain amount of existential pressure. I don’t think bankruptcy would be on the table without a cataclysmic economic or political event that lays waste to the entire auto sector, but Musk would have to pull way back, perhaps abandoning the 3 and focusing on the S and the X, in the process becoming a niche luxury carmaker rather than a mass-market purveyor of clean mobility.
Other stuff could go wrong. The fatal Autopilot accident in 2016 sent Tesla into a deep soul search, before the company decided that it needed to stay the course on its autonomous goals. There could be a massive recall (Tesla has already dealt with several modest ones). The Trump administration could withdraw support for electric vehicles, which could add $7,500 to the price tag of every Tesla sold (that’s the current federal tax credit).
But the worst of the worst-case scenario centers on the Model 3 and its delay or failure.
The best-case scenario
Now the good news. What if Tesla does everything right in 2017?
That outcome begins with launching the Model 3 before the end of the year. There’s a better-than-average chance that Tesla will launch the car sooner than expected, but that doesn’t mean they will be delivering 5,000 a month before 2017 closes out.
More likely, volume production won’t happen until mid-2018 or later. But an on-time launch will have huge symbolic effect and could send Tesla shares surging past $US300 for the first time.
Tesla could jump ahead on the self-driving front, using Autopilot to beat competitors such as General Motors and Ford to market by years. After 2016’s fatal Autopilot accident, Tesla has doubled down on the technology and is now building the hardware into every new vehicle.
Musk & Co. could unveil a host of new vehicles and stoke media interest in the brand. A crossover SUV — think smaller Model X — is already planned, the Model Y. And Musk has hinted at a pickup and a semi, not to mention a revamped Roadster, Tesla’s original car, production of which as discontinued a few years back. Teslas are bonkers fast, so serving up a proper sports car would delight the company’s most passionate fans.
Tesla could also begin to establish its Tesla Network of car-sharing options and lay the groundwork for ride hailing, providing some parity with Uber and Lyft and bringing Tesla into a Silicon Valley business that it’s largely missed out on so far.
Continued expansion of the Gigafactory in Nevada would be a good sign that Tesla’s energy ambitions can be supported, along with the Model 3 production rollout. Both of those would require a lot of lithium-ion-battery cells.
The solar factor
And let’s not overlook SolarCity. Musk has managed to rev up enthusiasm for Tesla’s solar roof, and an early rollout of that product would start to shift the old SolarCity business away from leasing and toward fully purchased solar solutions. That would support Tesla Energy, as many roof customers may want to buy a storage battery. But it would also help Tesla to start moving some assets off its balance sheet — leased SolarCity panels that Tesla is now responsible for.
If Tesla achieved most of this, the company would be riding high by the end of 2017, even if it burned all its cash (roughly $US3 billion) and continued to show no profit.”
What will probably happen
The news probably won’t be all good or all bad. It will likely be a mix of both.
To run it down:
—Tesla would launch the Model 3 early or as scheduled, but volume production wouldn’t arrive until late 2018. The bottom line is that although Tesla is getting better at launching cars, it’s still struggling to build them in large volumes.
—The stock would find a stable level, absent any big news. After a rally at the beginning of 2017, shares have fallen back after Tesla declined to offer full-year guidance on deliveries (last year was a miss, at just under 80,000, and 2017 could come in at something like 100-150,000, but Musk wants 500,000 by 2018). With another quarter or two of reporting to come before the Model 3 launch, investors will have opportunities to take profits. There’s a decent chance that Tesla could dip below $200 again before the end of the year.
—The SolarCity issues would be kicked down the road. Model 3 has to be the focus, so Musk will probably take the same progressive approach with solar roof as he has with Tesla Energy: a slow build. That said, investors are going to be concerned about how much more debt Tesla is carrying because high-growth companies aren’t supposed to be bogged down with liabilities.
—The Gigafactory would continue to expand.
—Tesla would get more aggressive about competing with Uber and Lyft. Time’s a wastin’, and the dominant narrative of tech-enabled mobility has decisively shifted from electric cars to shared transportation and transportation on demand.
—Autopilot would continue to improve. The technology is already state of the art and nobody else is racking up many real-world miles. Tesla’s ingrained network effects and first-mover advantage would start to pay dividends in 2017.
On balance, Tesla is under massive pressure to execute in 2017, but the company is in the best financial position it ever has been. Neither the best nor the worst should come to pass. But we’re going to want to pay attention no matter what.
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