Grand opening of Tesla Gigafactory

According to a report published in Fortune, Tesla Motors (TSLA) will open its Nevada-based Gigafactory on July 29, 2016. The report cited a Tesla email sent to partners and some customers who participated in its Model S referral program.

Let’s see why this event could reveal a lot about Tesla’s ability to deliver Model 3 on time.

Why Is the Grand Opening of Tesla Gigafactory So Important?

Why is Gigafactory important?

Tesla Gigafactory is expected to have annual battery production capacity of 35 GWh (gigawatt-hours). It’s being built in cooperation with Panasonic and other strategic partners.

Tesla’s upcoming mass-market electric vehicle Model 3 is likely to have a price tag of $35,000 without government incentives. It would be challenging for the company to deliver Model 3 at this price point. Cost reduction is the key for Tesla to make its Model 3 affordable for a large number of people and at the same time generate profit.

Large-volume production of a product can divide fixed costs and significantly reduce cost per unit. That’s why Gigafactory is so important for Tesla because it should bring down the cost of Model 3 battery packs with economies of scale. The success of its Model 3 is thus dependent on Gigafactory operations.

Mainstream automakers (XLY) such as General Motors (GM), Ford (F), and Honda (HMC) are also focusing on the future growth potentials of their electric vehicle segments.

What’s critical for Tesla’s advanced build plan?

In its 1Q16 shareholder letter, Tesla revealed that it plans to build half a million cars per year from fiscal 2018. This upped Tesla’s production plan by two years from the original plan for 2020. The company also stated that it remains on plan to make the first cells at its Gigafactory in 4Q16 and is adjusting its plan to accommodate the revised build plan there.

To achieve this advanced build plan, Tesla is highly dependent on the functioning of its Gigafactory. So the timely functioning of Gigafactory could become a game-changer for Tesla. The Gigafactory grand opening event on July 29, 2016, should help investors set their expectations for Gigafactory operations.

Next, we’ll look at Tesla’s valuation multiples ahead of its 2Q16 earnings.

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