Can Tesla Motors Inc Deliver Its Model 3 as Promised?

Tesla Motors (TSLA -1.73%)has a long way to go before it can make good on the hundreds of thousands of pre-orders it has amassed for its new Model 3.

The company is now reportedly nearing 400,000 people on the pre-order list for its new vehicle. That number isn't quite as daunting as it sounds because it only reflects people who put down a fully refundable deposit. Still, the company will almost certainly have a lot of cars to deliver, and whether it can meet the demand remains a big question.

In this segment from the MarketFoolery podcast, Chris Hill and David Kretzmann take a look at that question, and at what Tesla will have to do to rise to the challenge.

A full transcript follows the video.

This podcast was recorded on April 6, 2016. 

Chris Hill: Let's start with Tesla Motors, because one of the big stories last week was that Tesla unveiled the Model 3. This morning, they came out with some news on their first-quarter deliveries, a little bit of a miss there. But, let's go with the Model 3. I think, later today, they're going to be updating how many pre-orders they've gotten. But the pre-order, as I understand it, is anyone can put down $1,000 and reserve their own Model 3. And as of the latest public number I saw, 276,000 people.

David Kretzmann: Not bad. So, that's $276 million that Tesla has this week that it didn't have last week. (laughs) So, they're doing pretty well. That's some nice working capital that they can work with.

Hill: Now, some of those people can cancel.

Kretzmann: Right, it is fully refundable.

Hill: But for right now, like you said, that's nice working capital to have.

Kretzmann: Not bad, all in a week's work. No, with Tesla, the unveiling last week on March 31st, I mean, by all measures, this is a car that people want, clearly, with that level of pre-orders, which is beyond what Elon Musk or Tesla themselves expected. Clearly, this is a car that people are very excited for, they want.

The way I look at it, the ball is in Tesla's court now. All the company has to do now is execute and deliver what they've promised they can do, on time. So, their schedule at this point is that they'll be able to start manufacturing, delivering these cars by the end of next year. So, I think, in an ideal scenario, you'll have all these cars delivered to people, I'd say, by the end of 2018 or early 2019.

But, as we know with the Model X, their most recent vehicle, the company has had issues with manufacturing, delivery, production, getting things delivered and produced on time. The Model X was delayed about a year and a half. I think, if you saw something similar happen with the Model 3, when you have hundreds of thousands of people -- probably close to 400,000 at this point, it'll be interesting to see what the updated number is -- if those people have to end up waiting an extra year, year and a half, two years, then you'll probably start to see that refund rate tick up.

Hill: The Model 3 is, for lack of a better term, the mainstream vehicle. This is the cheaper version, this is the $35,000 version.

Kretzmann: Yeah, at the base level.

Hill: I think, if you're looking at this and you are... maybe not skeptical, but... and you touched on this, I think it is fair to look at Tesla and their track record to date in terms of deliveries and say, "Come on, can you really do this?" Because, as I said, they just this morning announced that first-quarter deliveries fell short of their own target.

Kretzmann: Right.

Hill: And they were very forthcoming about why they missed that target. I think they were aiming for 16,000 and they came in 14,000 and change, something like that. And, among other things, they blamed their own hubris for how much tech they put in the SUV and that sort of thing. And I'm always a fan of that kind of candor, but I also -- and this is not a stock I own -- look at them and say, "Okay, so you guys, by your own admission, had trouble delivering 16,000 vehicles. And now, you've got orders... " Whatever the number ends up being today, let's just assume it's north of 300,000.

Kretzmann: Yeah. I mean, just for some perspective, last year, the company delivered a little under 51,000 vehicles for the year. This year, they're shooting for 80,000 to 90,000 vehicles. And even with the miss in the first quarter, they're saying, "We're still on track for 80,000-90,0000 vehicles." But then, when you have upwards of 300,000 vehicles in pre-order, that's not including the Model S or Model X orders that they'll have and will need to fulfill in that timeframe ... this is a company with a lot of consumer excitement, as we mentioned. But it really is now in the company's court to ramp up that production as quickly as they can, while maintaining the quality and integrity of the product, which is obviously very important to the Tesla brand. 

It'll be a challenge. And this is a company that's still burning through a lot of cash. They're not making money. They burned through $2.1 billion in cash in 2015. They really need the Model 3 vehicle. This has been what Elon Musk describes as the secret master plan for Tesla where you start with the roadster, a low-volume high-price car; then you move to the Model S, and now the Model X, which is mid-price mid-volume; then you move to a mass-market, high-volume lower-price car with the Model 3. They need the Model 3 to work out. That has been the game plan all along.

So, if they can't get there and produce and deliver these vehicles profitably and on time... things look really great for this company, but as we've seen with the Model X, the track record is still a little shaky. But for now, man, the company is in a great position with so much customer excitement. You have to remember, this is a company that doesn't spend any money on marketing. So, to have that level of excitement with no dollars being spent on marketing is really quite impressive.