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Tesla Model 3: 4 New Things to Know

By Daniel Sparks - Updated Jul 10, 2017 at 12:40PM

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Here's the latest commentary from Tesla on the company's upcoming $35,000 fully electric vehicle.

This article was updated on July 7, 2017, and originally published on Feb. 28, 2017.

Tesla (TSLA 4.53%) investors have good reason to be very interested in any details about the electric-car maker's upcoming $35,000 Model 3. Tesla management expects the vehicle will help take the company from an annualized production run rate of about 100,000 units today to 500,000 units in 2018.

With the Model 3 slated for production and deliveries to begin in July, here's what investors can learn about it from Tesla's recent commentary on the important vehicle.

Model 3 driving down a tree-lined street

Model 3. Image source: Tesla Motors.

Tesla is still anti-selling the Model 3

When an analyst inquired during Tesla's fourth-quarter 2016 earnings call about the order book for Model 3, Tesla refused to go into detail.

"We're still in great shape," Tesla CFO Jason Wheeler said simply on the earnings call. Going further, CEO Elon Musk even said the company continues to "anti-sell" the Model 3, pushing interested customers toward its pricier Model S and Model X vehicles.

After the company unveiled its Model 3 in March 2016, deposit-backed reservations for the vehicle quickly skyrocketed as long lines of customers formed at Tesla stores to put in reservations. Between the vehicle's unveiling on March 31 and May 15, Tesla said Model 3 reservations climbed to 373,000. And Tesla recently said the reservations are climbing every week ahead of the Model 3 launch.

Since the first few weeks following the Model 3's launch, Tesla has put very little effort into promoting the vehicle.

"We don't want to make the line longer," Wheeler said in the same earnings call, summing up Tesla's mentality toward pre-production Model 3 demand.

Tesla expects an impressive gross margin for Model 3

While Musk admitted during the fourth-quarter earnings call that the Model 3 will initially have a "horribly negative margin," simply because of the initial slow rate of production on a "giant machine," Musk was surprisingly optimistic about Model 3's gross margin going forward.

"[A]s we get to the initial phase of capacity of 5,000 a week, I would expect to see gross margins comparable to that of the S and X," he said.

A Tesla vehicle in an early stage of production on the robotic assembly line

Tesla vehicle production at its factory in Fremont, California. Image source: Author.

When will Tesla get to a production rate of 5,000 vehicles per week for Model 3? Tesla expects Model 3 to achieve this production rate before the end of the year.

Therefore, Tesla essentially expects Model 3 to have Model S- and Model X-like gross margins going into 2018.

What do Model S and Model X gross margins look like? In Tesla's fourth quarter  of 2016, non-GAAP automotive gross margin, which includes combined sales of Model S and X and excludes the benefit of zero-emission vehicle credits, was 22.2%. But this gross margin level was abnormally low because Tesla wasn't able to recognize new Autopilot-related revenue during the fourth quarter since the company delayed a planned software update to enable the driver-assist technology until Q1. Tesla's non-GAAP automotive gross margin in the third quarter of 2016 was 25%. And Tesla's non-GAAP automotive gross margin in the first quarter of 2017 was 27.8%.

The Model 3 achieving a gross profit margin in the 22% to 28% range that Tesla's Model S and X sales have achieved in recent quarters would represent quite an achievement.

Don't expect to see the final version of Model 3 until deliveries begin

Given that Tesla has previously said it could make more Model 3 announcements in March or April, some investors may have been expecting a full unveiling of the production version of Model 3 before the company began production of the vehicle in July. But as Model 3 production nears, Musk is leaning toward a more low-key approach to bringing the car to market.

I'm not sure if it kind of makes sense for us to show the final version before starting production or after. The initial cars are sort of [indiscernible] actually go to company employees because I think it's important for us to have a good feedback with on the product that we're making and if there are any issues or valuable things that need to be addressed that we can address those before customers experience them. So I think in terms of showing a final version probably at least a few months away or maybe as far as July itself...

Elon Musk unveils Model 3 prototype

Elon Musk unveils Model 3 prototype. Image source: Author.

The production version of Model 3 will be "a lot better"

While Tesla hasn't revealed any new concrete details about the production version of Model 3, Musk is confident the final version will impress.

Here's Musk, during Tesla's fourth-quarter shareholder letter, on what to expect from the final version:

[I]t's going to be pretty close to what I showed at the Model 3 unveiling but with polish and refinement and a few more details that are added. It will be better than what was unveiled. And I guess in some ways, it will be a lot better.

Given its critical importance to Tesla's growth story, investors should keep an eye on the Model 3 as Tesla begins delivering the vehicle to customers and attempts to ramp up production.

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