How the Model 3 Could Help Triple Tesla's Revenue

Markets Motley Fool

Electric-car maker Tesla (NASDAQ: TSLA) expects its recently launched Model 3 to help the company's sales soar, simultaneously accelerating a mass-market transition to electric vehicles. But just how big are Tesla's expectations for the Model 3?

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Today, Tesla's Model 3 deliveries are paltry. But management asserts it is currently laying the groundwork for production capacity to begin surging by the end of this year. Here's a close look at just how ambitious Tesla's expectations for Model 3 are.

Tesla's production plans

Currently, Tesla is producing its Model S and X at a combined annualized run-rate of just over 100,000 units. But by next year, management believes Tesla will build 500,000 vehicles between its Model S and X and its July launched Model 3.

Here's how Tesla plans to get to this enormous figure.

  • Tesla expects vehicle production to follow an S-curve, rising slowly at first but climbing steeply toward the end of the year.

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  • Highlighting how low initial Model 3 deliveries will be, Tesla only expects to build about 100 units in August and just over 1,500 during the third quarter. 
  • Before the end of 2017, Tesla anticipates achieving a weekly Model 3 production rate of 5,000 units.
  • Management is targeting for Model 3 production to reach 10,000 vehicles per week "at some point in 2018."
  • Tesla believes there is still more upside for its Model S and X, forecasting combined deliveries in the second half of 2017 to be higher than in the first half.
  • Tesla says its Model X, which was launched in late 2015, still has "substantial untapped sales potential," making a case for strong Model X sales growth into 2018.

With all of this in mind, Tesla's 500,000-unit build plan for 2018 could be made up of around 150,000 combined Model S and X units and 350,000 Model 3 units. However, given that some of these units won't be delivered until the beginning of 2019, this build plan could mean about 140,000 combined Model S and X deliveries and 320,000 Model 3 deliveries during 2018.

Forecasting revenue

With this planned production ramp in mind, it's possible to estimate what 2018 revenue could look like if Tesla pulls off its aggressive plan.

2018 Model S and X revenue: In Tesla's most recent quarter, the average selling price of the electric-car company's Model S and X was just over $100,000. Assuming this figure comes down to about $90,000 next year as the market for the high-priced vehicles matures, 140,000 combined Model S and X deliveries could contribute about $12.6 billion in annual revenue.

2018 Model 3 revenue: Tesla CEO Elon Musk has said he expects the Model 3 to sport an average selling price of about $50,000 when the Model 3 is at full production. Therefore, 320,000 Model 3 deliveries in 2018 could contribute about $16 billion of revenue.

Adding these two figures together, Tesla's automotive revenue next year could be around $28.6 billion. Then add in expected revenue from Tesla's energy and services segments -- two facets of the automaker's business expected to continue growing rapidly -- and Tesla's revenue next year could surpass $30 billion, tripling Tesla's $10.07 billion in trailing-12-month revenue.

Of course, there's significant risk to Tesla's aggressive production plans, namely production and supplier execution and Tesla's rapidly rising capital expenditures. Further, it's worth emphasizing that these estimates are only ballpark forecasts. So, even if Tesla did achieve a 500,000-unit build rate in 2018, actual revenue figures could be higher or lower.

But this exercise makes one thing unmistakably clear: Tesla's growth plans are absolutely massive.

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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.