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Why Tesla Stock Could Remain Highly Volatile in 2Q18

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Apr. 27 2018, Updated 6:31 a.m. ET

Tesla’s 1Q18 earnings release

Analysts’ estimates for Tesla’s (TSLA) 1Q18 revenues suggest a temporary decline in growth but good recovery in the next couple of quarters. Its gross margins are expected to keep suffering due to higher costs related to the Model 3 production ramp-up. In this part of the series, we’ll explore some key expected updates from Tesla’s upcoming earnings event and find out why 2Q18 could continue to be challenging for the company.

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Volatility in TSLA stock

Tesla stock delivered positive returns of 45.7% in 2017. Much of this optimism was seen in the first half of 2017 due to investors’ high expectations for the Model 3 and its high volume production plan for 2018.

However, the Model 3 production ramp-up was much slower than the company’s own expectation, which also delayed its high volume production plan. That has been driving pessimism in Tesla stock for more than six months. As of April 23, TSLA stock has fallen 15.9% over the last six months. During that period, auto stocks (FXD) for Fiat Chrysler (FCAU), Toyota (TM), and Honda (HMC) have risen 44.7%, 6.7%, and 14%, respectively. General Motors (GM) and Ford (F) have fallen 14.9% and 4.7%, respectively, in the last six months.

Focus on Model 3 production

It’s no secret that the Model 3 could play an important role in defining Tesla’s future growth since it’s the company’s first mass-targeted electric vehicle. High volume production of the Model 3 is also likely to help Tesla protect its profit margins going forward.

Tesla was able to nearly triple its Model 3 production to 9,766 units in 1Q18 compared to 2,425 units in 4Q17. However, it couldn’t achieve the expected Model 3 production rate of 2,500 units per week. That’s the reason the Model 3 production rate should remain investors’ prime focus in the next few quarters, which could keep its stock highly volatile in 2Q18.

Tesla still expects to achieve 5,000 units per week for its Model 3 production rate by the end of 2Q18.

In the next part, we’ll take a look at Tesla’s valuation multiples and what they look like before its 1Q18 earnings release.

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