Going into Tesla's (TSLA -1.92%) fourth quarter, one of the key items to watch was whether the electric-car company would still be on track with its most recently updated Model 3 production targets. Sure enough, it was. Management said it would hit a weekly Model 3 production rate of 2,500 units by the end of its first quarter, and a weekly rate of 5,000 units by the end of Q2.
Of course, there was far more to the quarterly report than this important update on Model 3. Here are three of the most telling insights from Tesla's fourth-quarter shareholder letter.
Model 3. Image source: Tesla.
1. Tesla expects positive operating income on a sustained basis
"A some point in 2018," Tesla said it expected to begin regularly reporting operating income.
However, this achievement will require Tesla's Model 3 production ramp to go as planned. Until Model 3 production ramps up, high per-unit costs will likely hurt Tesla's bottom line. Indeed, management is forecasting a negative gross margin for Model 3 in Q1 even if Model 3 production really does exit the quarter at a rate of 2,500 units per week.
Once Model 3 production stabilizes at a weekly rate of 5,000 units, Tesla believes the new vehicle will sport a meaty gross margin of 25%, playing a key role in achieving -- and sustaining -- positive operating income.
2. Demand for Model 3 remains extraordinary
Tesla was initially aiming to achieve a weekly production rate of 5,000 Model 3s by the end of 2017. With the target pushed back to the middle of 2018, it wouldn't be surprising to see demand start to dwindle for Model 3 as customers give up on the long wait.
But Tesla said, "Model 3 net reservations remained stable in Q4." Indeed, during the few weeks leading up to Tesla's fourth-quarter earnings release, which took place more than a month into Q1, Model 3 reservations have continued to grow, Tesla said.
Key drivers for heightened Model 3 demand, Tesla noted, were the arrival of some Model 3 units at select Tesla stores and "numerous positive reviews, including Automobile Magazine's 2018 Design of the Year award."
Last summer, Tesla said its deposit-backed net Model 3 reservations were at about 455,000.
3. Model 3 isn't cannibalizing demand for Model S and Model X
One concern before the Model 3 launched was whether the lower-cost vehicle would cannibalize demand for Tesla's Model S and Model X, which are currently the automaker's bread and butter. After all, the Model 3 starts at about half the price of the Model S and Model X.
For now, this isn't happening.
Tesla explained:
There had initially been concerns about whether Model 3 would cannibalize Model S and Model X. It seems the opposite is true. In stores where Model 3 is on display, customer foot traffic has increased considerably and orders for Model S and Model X have in fact increased.
As a result, Tesla is aiming to deliver about 100,000 Model S and Model X vehicles in 2018 -- about in line with the approximately 101,000 combined deliveries of the two vehicles it saw in 2017.
Model X. Image source: Tesla.
Sales of the two vehicles will be limited by production constraints of its old 18650 battery form factor.
Despite a target for combined production for the two vehicles that is in line with 2017 production, Tesla still believes demand for Model S and Model X will grow -- and management plans to take advantage of it:
As our sales network continues to expand to new markets in 2018, we believe orders should continue to grow. With demand outpacing production, we plan to optimize the options mix in order to maximize gross margin.
Tesla's fourth-quarter shareholder letter can be found in full on the investor relations portion of its website.
