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Tesla, Inc. Stock Hits New High Ahead of Model 3 Production

By Daniel Sparks – May 30, 2017 at 8:06PM

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Is Tesla's valuation getting ahead of itself?

Shares of electric-car company Tesla (TSLA -1.44%) hit a new high on Tuesday, closing the trading day at $335.10. During intraday trading, shares climbed as high as $336.28. The gain tops off an extraordinary rise for the stock since late last year. Shares are up about 69% since Dec. 15.

The stock's rise comes ahead of the company's planned start for Model 3 production. The $35,000 electric vehicle, which will be Tesla's lowest-cost car yet, is slated to begin deliveries to customers in July

TSLA Chart

TSLA data by YCharts

Model 3 is coming

Investors are right to be more optimistic about Tesla's ability to produce and deliver the Model 3. With July only about a month away, and no word of any production delays, Tesla's aggressive timeline for bringing its Model 3 to market appears to be on schedule.

Tesla's most recent updates on the vehicle's timeline support this idea. The Model 3 is "on track for initial production in July," Tesla said in its May 3 quarterly update.  Going further, Tesla said it now expects to achieve a production rate for the Model 3 of 5,000 vehicles per week at some point in 2017.

And Tesla CEO Elon Musk's more recent comments about the Model 3 continue to suggest that the company is on schedule with its production ramp-up. In a May 21 tweet,  Musk confirmed that Tesla is planning not only to begin Model 3 production in July, but also to deliver the first Model 3 vehicles. Further, last week Tesla released a Model S and Model 3 comparison table, outlining key differences between the flagship Model S and the less expensive Model 3, and suggesting that Tesla is honing the important vehicle's final specifications.

Buyer beware

Despite all signs pointing to a timely Model 3 launch, investors should carefully consider Tesla stock's pricey valuation. Trading at $335, the company currently has a market capitalization of $55 billion, well ahead of Ford's $44 billion value and even General Motors' $51 billion market cap.

In other words, investors should keep in mind that Tesla stock is already priced for sustained massive business growth for years to come.

Tesla vehicle production in the Fremont, California, factory.

Tesla vehicle production. Image source: author.

With the help of the Model 3, Tesla management expects annual vehicle production to jump from a rate about 100,000 units today to 500,000 units next year, and to about 1 million units by 2020. A growth ramp-up like this would not only help Tesla further fortify its lead in the electric-vehicle market, but it would also position the company solidly to compete with the world's largest automakers, which produce vehicles in the millions every year.

In light of Tesla stock's recent rise, investors are on board with Tesla management's expectations for volume production. Further, the valuation suggests that Tesla will be able to eventually generate meaningful net income on its higher sales volume.

Going forward, investors should look for Tesla to not only begin Model 3 production on time, but also to achieve its target production rate for the vehicle of 5,000 units per week before the end of the year. While Tesla has proved it can rapidly increase production with its Model S sedan and Model X SUV, the high-volume Model 3 will be a new type of test for Tesla.

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Stocks Mentioned

Tesla Stock Quote
Tesla
TSLA
$179.82 (-1.44%) $-2.63
Ford Motor Stock Quote
Ford Motor
F
$13.28 (-0.75%) $0.10
General Motors Stock Quote
General Motors
GM
$38.02 (-1.98%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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