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The Future of Tesla Inc (TSLA) Stock All Depends on the Model 3

James Brumley

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Tesla Inc (NASDAQ:TSLA) hosted a publicity event last Friday that rivals those of new-product unveilings from tech icon Apple Inc. (NASDAQ:AAPL). In an incredible public spectacle, Tesla CEO Elon Musk delivered the first thirty Model 3 cars to their respective buyers. That didn’t do anything for TSLA stock, of course. But considering shares are up 56% since the end of last year, the good news was mostly baked in.

Tesla (TSLA)

Source: Shutterstock

Still, inasmuch as the company’s affordable “every man” electric vehicle is now a reality, the premise and promise of Tesla is about to be put to the test.

The core question is, does the Model 3 deliver the goods well enough to get the company over its fiscal hump?

The Model 3 Is Deemed a Winner

Most owners of TSLA stock who’ve stuck with it this long have to be pleased with the initial opinions of the car. Namely, the base price is indeed a mostly affordable $35,000, and for that a buyer gets an electric vehicle that can travel 220 miles on one charge. For drivers willing to spend more, an upgrade allows for 310 miles of driving.

Both versions of the electric car can accelerate from 0 to 60 miles per hour in less than six seconds, satisfying the thrill-seeker tucked away inside most drivers. The interior is lean and clean, yet elegant as well.

Business Insider’s Matthew DeBord was one of several glowing initial reviews of the vehicle. Said DeBord:

“But it’s more than that. Even though it’s a small four-door and the market is moving away from this type of vehicle to embrace crossover and SUVs, there isn’t anybody who’s going to sit in the driver’s seat of this car and not want it, if only briefly. The Model 3 stokes immediate desire, and the lust lingers. That truly changes everything.”

That’s the good news.

On the Other Hand …

While the initial reviews were raves, the touted ones were — to be blunt — offered by (1) people who were going to give the Model 3 a glowing review no matter what, and (2) without regard for the profitability needed to supply a tailwind for Tesla stock.

With that consideration on the table, some things change.

The Model 3 was intended to be a mass market vehicle in that it starts at an affordable $35,000. However, most drivers will find their actual price for a well-equipped one is much, much higher — back to unaffordable levels. The version that can travel 310 miles in a charge will cost an extra $9,000. Enhanced Autopilot adds $5,000 to the price, while the fully self-driving version adds another $3,000 to the cost. That brings the tally up to $52,000, which is a far cry from “affordable” for the average Joe.

But the $7,500 subsidy brings the cost down to more manageable levels, you say? Not so fast.

The subsidy is only granted to the buyers of the first 200,000 electric vehicles offered by one manufacturer. It’s phased out (rather quickly too) past that mark, meaning a large number of the more than half a million people on the Model 3 waiting list won’t be the beneficiary of any subsidy at all. Bear in mind that the deposit on a Model 3 reservation is refundable, so it’s hardly a purchase commitment.

Other Concerns

Additionally, Musk almost certainly will have to raise capital — again — to start producing the Model 3 on a mass market scale. With or without that expense, however, what Musk described as an entry into “manufacturing hell” to get the Model 3 line going full speed was enough to send TSLA stock lower to the tune of 4% on Monday. The market clearly isn’t pleased.

In the meantime, now that Tesla has mainstreamed and legitimized electric vehicles, Mercedes, BMW and Volkswagen AG (OTCMKTS:VLKAY) are all planning new EV launches in the very foreseeable future. Their take on this sliver of the market is apt to be a much cooler one than the battery-powered toys made by General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) that have struggled to compete with Teslas.

In other words, Tesla doesn’t have a straight and easy path to mass-market dominance.

Earnings Could be the Catalyst for TSLA Stock

Tesla will post its second quarter results after Wednesday’s close. Analysts are collectively expecting a loss of $1.81 per share on revenue of $2.55 billion. That’s a much better top line than the $1.27 billion in sales Tesla produced in the same quarter a year earlier, though the bottom line is set to worsen from the $1.61 per share of TSLA stock lost in Q2 of 2016.

Those numbers won’t include any revenue stemming from sales of the Model 3, as they didn’t begin delivery until the quarter currently underway. Those accounting reports will, however, reflect at least some of the expenses associated with retooling and preparing for the production of the lower-end car.

As has always been the case with Tesla’s earnings reports though, the response TSLA stock dishes out will be less driven by results and more driven by the rhetoric that always surrounds this ballyhooed name. Profitability (or lack thereof) is sure to be part of that discussion, and the potential profits of the Model 3 will be a key part of that debate.

Listen carefully to that rhetoric.

Between the advent of the Model 3 and a key earnings report, the next few days are going to be telling as to how the market really feels about the company’s future. The weak start to the new trading week for TSLA stock — just a couple days removed from the big event — isn’t an auspicious beginning.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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