Shares of Tesla (TSLA +2.40%) were slammed last week, tumbling about 10%. The electric-car company's achievement of its target production rate of 5,000 Model 3 units per week failed to impress Wall Street as investors worried whether this herculean end-of-the-quarter push is sustainable.
After Tesla burned through $1.4 billion in its most recent quarter, some analysts and short-sellers have likened the automaker's current situation to General Motors and Enron shortly before their collapse and eventual bankruptcies. Is last week's decline a sign of worse times ahead? Or is this a buying opportunity?
For investors willing to endure volatility, last week's sell-off may represent an attractive entry point. Here are three reasons why Tesla's future is likely brighter than recent headlines suggest.
Model 3. Image source: Tesla.
1. Deliveries are soaring
While Tesla is definitely running behind on its initial production targets, investors should note that deliveries are still skyrocketing. In the second quarter, total vehicle deliveries increased 36% sequentially and 85% year over year. And thanks to Tesla's higher production rate and its 11,166 Model 3 vehicles and 3,892 Model S and X vehicles in transit at the end of the quarter (up from just 2,040 Model 3 and 4,060 Model S and X vehicles in Q1),, year-over-year growth in vehicle deliveries will likely be even sharper in Q3.
Model 3 deliveries, in particular, are skyrocketing. Second-quarter Model 3 deliveries of 18,440 units were up from 8,182 deliveries in the first quarter of 2018 and 1,542 deliveries in the fourth quarter of 2017.
Looking ahead, Tesla's vehicle deliveries look poised to continue increasing rapidly. Total second-quarter vehicle production was up 55% sequentially and Tesla said it should be able to increase Model 3 production from a rate of 5,000 units per week at the end of Q2 to 6,000 units per week by late August.
Rapidly rising sales can have a dramatic impact on a company's finances. Indeed, its recent execution in increasing production and deliveries has management forecasting it will achieve both positive cash flow and positive net income in Q3 and Q4.
2. Demand is off the charts
Consumers want Model 3 -- 420,000 of them to be exact. Sure, Tesla said its deposit-backed Model 3 reservations have pulled back from a level just above 450,000. But this is understandable as Tesla has done very little to market Model 3.
With nearly half a million reservations despite the company's muted efforts to generate appetite for the vehicle, Tesla isn't concerned one bit about demand for it. "When we start to provide customers an opportunity to see and test drive the car at their local store, we expect that our orders will grow faster than our production rate," Tesla said in its second-quarter update on vehicle deliveries and production. "Model 3 Dual Motor All Wheel Drive and Model 3 Dual Motor All Wheel Drive Performance cars will also be available in our stores shortly."
Model 3. Image source: Tesla.
3. Tesla could easily raise capital
Last, Tesla could give its balance sheet a boost if it wanted to by raising capital. With a $52 billion market capitalization, the overall sentiment from investors is optimistic -- even if last week's decline suggests otherwise. This premium valuation means it could raise significant capital by selling equity. Though this would dilute shareholder ownership, it would also mitigate balance sheet concerns while giving it more flexibility to pursue the significant and timely opportunities.
Raising capital isn't always a good option. But when capital raises are paired with soaring sales and exuberant demand, they could ultimately benefit shareholders over the long haul.
Combining its recent ability to significantly increase deliveries, the Model 3's ability to lull hundreds of thousands of reservations, Tesla's access to capital when it's needed, and the ever-increasing signs that the future of autos is electric, last week's sell-off looks like an overreaction.
