As August comes to a close this week, Tesla (TSLA +2.40%) will be wrapping up its first full month of Model 3 deliveries. Investors will be hoping the electric-car maker is making progress on its important production ramp-up for its Model 3.
However, investors shouldn't expect much from Model 3 deliveries in August. Tesla CEO Elon Musk has referred to the initial production ramp-up as "production hell," noting that the first few months will include very low deliveries, as production follows an S-curve.
Image source: Tesla.
But this doesn't mean investors should underestimate August's importance in Tesla's Model 3 production ramp-up. Tesla must go through "production hell" in order to get to volume production and deliveries.
Model 3 deliveries
The best guess investors have on what to expect from Tesla's Model 3 in August comes from a tweet from Musk in July. While it wasn't clear in his tweet whether he was talking about production or deliveries, he estimated Tesla would either produce or deliver about 100 Model 3 units in August and over 1,500 in September.
In Tesla's second-quarter shareholder letter, which came nearly a month after Musk's tweet and a five days after the first Model 3 deliveries, the company explicitly said it expects to produce "just over 1,500" Model 3 units during the third quarter. Assuming Tesla delivers most Model 3 units in close proximity to its factory during the third quarter, and assuming the bulk of these production units go to customers instead of Tesla stores, Tesla could deliver around 1,200 to 1,400 Model 3 units before the third quarter is over.
Similarly, if Tesla is expecting to produce 100 Model 3 units in August, Model 3 deliveries during the month will likely be around 70 to 90 units.
Though these figures are paltry, they are notably up from the 30 Model 3 units Tesla delivered at its July 28 Model 3 handover event. These projections also fit nicely into Tesla's expected S-curve ramp-up.
August is more important than it might seem
The first few months of Model 3 deliveries may pale in comparison to the 8,000 to 8,500 combined Model S and Model X deliveries Tesla is likely pumping each month today. But investors shouldn't overlook the importance of these first few months.
It's during these slower months that Tesla can lay the foundations for the rapidly climbing portion of its production curve. This means that headwinds in the first months could ultimately delay Tesla's target to get to volume production by the end of the year, pushing this important milestone to 2018.
Model 3. Image source: Tesla.
As the year goes on, Tesla expects Model 3 production and deliveries to jump sharply. Though management only expects to produce about 100 Model 3s in August and 1,500 in Q3, it anticipates achieving a weekly production run rate of 5,000 vehicles by the end of the year -- more than double Tesla's weekly production for Model S and X combined.
With hundreds of thousands of deposit-backed reservations, Model 3 sales in the near term will be entirely dependent on Tesla's ability to ramp up production -- and August represents the start of this important effort.
