In a move that demonstrates progress on the important Model 3 production ramp, Tesla (NASDAQ:TSLA) has started accepting orders for the new vehicle from reservation holders who were not previous Tesla owners. After the electric-car maker announced two delays to its Model 3 production targets, mounting evidence that Model 3 production is finally on track with the company's aggressive production plans is good news for shareholders.
The Model 3 launched last year, but initial deliveries have been limited to employees and to customers who had purchased Tesla's pricier vehicles. By prioritizing employee deliveries, Tesla was reducing the feedback loop for early production models to more easily address faults before expanding deliveries to new customers. In addition, Tesla prioritized deliveries to previous Tesla owners as a means to reward early adopters for betting on the company in its earlier years.
But Tesla gradually started contacting some first-time owners on Thursday, inviting them to configure and order their Model 3 sedans, Tesla confirmed with The Motley Fool. In addition, a Tesla spokesperson said that customers can expect to take delivery of their Model 3s about four weeks after their orders are placed.
This is welcome news after Tesla's Model 3 production challenges in the beginning. In Tesla's most recently ended quarter, the company delivered just 1,542 Model 3 units. The minuscule deliveries, which were way below what investors were expecting, made it unclear if Tesla could ramp up production fast enough to begin delivering to customers who were new to the brand during the first quarter of 2018.
Can Tesla start hitting targets?
After the company pushed back its Model 3 production targets by about six months, investors have been watching the important vehicle's production ramp-up closely. The last delay was announced a few days into the year, alongside Tesla's quarterly vehicle delivery report. But when Tesla released its fourth-quarter results in February, the company said it was on track with its most recently announced production targets. And Thursday's news about opening up orders to new customers suggests the Model 3's production ramp-up continues to go smoothly.
Management expects Model 3 production to increase exponentially, aiming to end its first quarter at a production rate of 2,500 Model 3 units per week and to achieve a rate of 5,000 units per week by the end of its second quarter.
With Tesla now accepting orders from new customers, is Model 3 production finally kicking into high gear?
Tesla needs Model 3 production to accelerate quickly in order to help cover the costs of its hefty capital spending. The automaker expects capital expenditures in 2018 to be slightly higher than the record $3.4 billion recorded in 2017. The high capital expenditures last year led to significant negative free cash flow, to the tune of $3.5 billion.
Until Model 3 production and deliveries ramp up to the point the vehicle begins contributing positive operating cash flow, Tesla is at risk of needing to raise more capital through debt or equity. Fortunately, Tesla expects Model 3's gross profit margin to get to around 25% after production reaches 5,000 units per week. But Tesla investors have good reason to be skeptical after the company's recent production-target misses.