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All eyes on Model 3 as Tesla reports earnings late Wednesday

  • Tesla released its first batch of Model 3 sedans on Friday.
  • The company said it has about 500,000 reservations for the car.
  • Analysts are worried the company won't be able to pick up production of the car fast enough.
  • There also are fears Model 3 sales will cut into sales of Tesla's high-end cars.

With Tesla set to release its second-quarter earnings Wednesday after the market closes, all eyes are on what it has to say about its Model 3.

On Friday, the company delivered its first batch of the highly anticipated sedans.

Reservations for the Model 3, which starts at $35,000, have grown to more than 500,000, up from the 373,000 the company reported in the spring of 2016. That is more than the total annual sales of any entry-level luxury car, said Bernstein analyst Toni Sacconaghi in a note sent Monday.

Yet, analysts still have concerns over whether Tesla can make the cars fast enough, keep the Model 3 from eating into sales of its higher-end cars, and fend off eventual competition from experienced competitors.

At a company event on Friday, Tesla CEO Elon Musk said Tesla will be in "production hell" for the next six months or longer as it ramps up Model 3 production. Even with that, customers who order a Model 3 now will likely not receive it until the end of 2018, he added.

"CEO Elon Musk sounds increasingly squeamish about the production ramp," Sacconaghi said in his note.

Similarly, Baird analyst Ben Kallo said in a note sent Monday that though Tesla aims to produce 500,000 vehicles in 2018, "we continue to be conservative in our estimates (we model 310k total vehicles)."

And there are questions about whether the Model 3 will cut into sales of the higher-end Model S, which could put pressure on Tesla's margins. "Cannibalization appears likely," Sacconaghi said. Some data indicate slackening demand for the S and X models ahead of the Model 3's release. Investors will be looking for signs of this in the earnings report.

Tesla has repeatedly spoken of the differences between the Model 3 and the Model S, stressing that the Model 3, despite its name, is not meant to be an improvement over Model S or a newer version of an older model. Musk said on Twitter in late March that he was "noticing that many people think Model 3 is the "next version" of a Tesla, like iPhone 2 vs 3. This is not true."

He added "Model 3 is just a smaller, more affordable version of Model S with less range & power & fewer features. Model S has more advanced technology."

The company also wrote a blog post describing the differences between the two models.

While the base Model 3 will be $35,000, considerably cheaper and with fewer features than the Model S, which runs just over $70,000, there is plenty of room to upgrade the Model 3 — and raise the price.

The base rear-wheel drive Model 3 will only go an estimated 220 miles per charge. But the same car with the $9,000 extended-range package can drive an estimated 310 miles on a single charge.

Numbers provided by Tesla show customers also can choose from a further range of options that can bump the price up to about $59,000, only $11,000 less than the Model S. Choosing any color besides black costs $1,000, while adding autopilot costs $5,000 to $8,000, depending on the level of capability. Sport wheels are another $1,500.

However, one can see why analysts fear cannibalization of Model S sales. A base Model S with rear-wheel drive can only drive 249 miles on a single charge, and that costs $26,000 more than the Model 3 with the extended battery range.

Then there is the question of looming competition on the horizon, particularly from luxury brands.

"We think the traditional auto industry is fighting back and will have the ability to make profitable, electrified vehicles on a five-year view, and at the same time navigate the disruptive mobility landscape of car-sharing and autonomous driving with a goal of making money there as well," said Barclays analyst Brian Johnson in a note sent Friday.

As for the earnings report, analysts surveyed by Thomson Reuters, on average, expect Tesla to report a second-quarter loss of $1.82 per share on $2.51 billion in revenue.

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