Please ensure Javascript is enabled for purposes of website accessibility

Why Tesla Inc Shares Plunged 22% Last Month

By Travis Hoium – Updated Apr 6, 2018 at 3:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There were a lot of worries about the company's future in March.

What happened

Shares of leading electric vehicle manufacturer Tesla Inc (TSLA -3.46%) fell 22.4% in March, according to data provided by S&P Global Market Intelligence, as investors started to question whether the company could deliver Model 3 units as quickly as planned. The stock may have gained most of its losses back early in April, with shares trading over $300 as I'm writing, but it's worth understanding why it was down in the first place. 

So what

The big question facing Tesla today is: Can it make the Model 3 profitably and at scale in 2018? 

If it can, the company will increase cash flow from operations quickly as production is ramped up and it can use that cash flow to fund other growth projects. If the Model 3's delays continue, it may mean Tesla needs another injection of capital from either debt or equity markets. And given the number of times the company has had to turn to public markets for money, there's a risk that investors won't want to fund another delayed project. 

Model S sitting in a driveway in the mountains.

Image source: Tesla.

During the month of March, investors were concerned that more delays were on the horizon as word leaked that Tesla was rushing to meet its end-of-quarter goals. Bonds fell, raising the potential cost of funding if debt needs to be issued, and the stock market followed suit.

At the end of the day, 9,766 Model 3s were made in the first quarter, including 2,020 in the last week of the quarter, falling well short of the 2,500-per-week pace management had predicted. But they stuck with a projection of a production pace of 5,000 Model 3 units per week at the end of the second quarter, giving investors enough confidence to rush back into the stock in April. 

Now what 

Tesla continues to fall short of its own production targets, but management has stated they don't expect another capital raise this year to fund the Model 3 expansion. I'm skeptical that capital won't be needed, but it may not matter if Tesla's stock remains above $300. Right now, Tesla's future rides on the market's confidence in the company and there doesn't seem to be much that can deter investors betting on Tesla. But shareholders should watch its capital needs, because if Wall Street suddenly stops the flow of money to Tesla, the company could be in a perilous financial position.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla Stock Quote
$240.81 (-3.46%) $-8.63

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.