Tesla, Inc. Earnings: Model 3 to Come Into Focus

By Daniel Sparks Markets Fool.com

Electric-car company Tesla (NASDAQ: TSLA) just scheduled its fourth-quarter earnings release. The company will post results for the fourth quarter on Wednesday, Feb. 22, closing out a year of rapid vehicle sales growth, and marking the first reported quarter with the November-acquired SolarCity under its ownership.

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Ahead of Tesla's financial results, here's some background on key areas to watch when the company updates investors.

Model 3. Image source: Tesla Motors.

The most important question: Is the Model 3 launch on track?

For Tesla, this will be a critical year. In 2017, the company importantly plans to launch its first mass-market vehicle: Model 3. The big question, therefore, is whether Tesla's Model 3 is still "on plan for volume deliveries in the second half of 2017," as Tesla said in its third-quarter update.

To put the importance of Model 3 into context, consider that Tesla expects Model 3 to help the company build 500,000 total vehicles in 2018, up from Tesla's current annualized run-rate of 100,000 units. In other words, Tesla likely anticipates Model 3 production to come close to 400,000 units in 2018. Assuming the vehicle, which has a starting price of $35,000, sells for an average price of $43,000, this would put annualized Model 3 revenue at about $17 billion once production hits these levels. Indeed, even Tesla CEO Elon Musk has said he expects Model 3 to evolve into a $20 billion program, generating $5 billion in gross profit for the company on a 25% gross profit margin.

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In Tesla's third-quarter update, the automaker said the company had completed production line layouts for Model 3 and was preparing to begin the installation of new body welding and final assembly lines for the vehicle.

"As refinement of the Model 3 continues, we remain on plan for our timing, volume, vehicle capability, pricing, and margin targets," Tesla said. More recently, the company also said it expects to begin cell production for the Model 3 in the second quarter of 2017.

Big spending ahead of Model 3

Increasing production from an annualized run-rate of 100,000 units to 500,000 units in 2018 is going to require some significant step-ups in expenses and capital outlays.

Tesla car factory. Image source: author.

To this end, Tesla has said it expects fourth-quarter expenses to help drive full-year non-GAAP expenses up by about 30%, with management citing engineering, design, an expanding geographic presence, and "testing expenses related to Model 3 supplier contracts" as primary reasons for the expense growth.

Further, Tesla expects capital expenditures for the quarter to exceed $1 billion, exceeding the company's total capital expenditures in the past three quarters combined of $759 million.

Guidance: How many vehicles does Tesla expect to deliver in 2017?

Finally, one notable area to watch in Tesla's fourth-quarter update will be the company's guidance for vehicle deliveries. In past fourth-quarter updates, Tesla usually opts to provide a full-year outlook for its vehicle deliveries.

Model 3. Image source: Tesla Motors.

It's difficult to anticipate what management expects from vehicle deliveries in 2017. But guidance will likely represent a very wide range given the uncertainties surrounding the timing of a sharp ramp-up in Model 3 deliveries. However, considering Tesla has consistently increased deliveries at about 50% annually, investors should at least look for another year of 50% growth. This would peg 2017 deliveries at about 114,000. Of course, if Tesla's Model 3 production ramp-up goes as the company hopes it will, Tesla could deliver as many as 200,000 vehicles.

I'd say it's safe to expect full-year guidance for deliveries in the range of 115,000 and 200,000 units.

Model 3 will obviously be the prime item for investors to keep an eye on when Tesla reports results. Not only is it critical to helping Tesla establish itself as a higher-volume automotive company, but the vehicle's timing is needed to justify big investments Tesla is already making, including its Gigafactory and an aggressive expansion at its car factory in California.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.