Tesla shares drop after posting wider-than-expected loss

PALO ALTO, Calif. (CNBC) — Tesla shares fell Wednesday after the company posted a wider-than-expected loss as it spent heavily to ramp up production of its Model 3, its first mass market electric sedan.

Complications with Tesla’s manufacturing processes have slowed production of the Model 3, a car widely considered key to Tesla’s future success. Hopes for the Model 3 have helped propel Tesla’s stock so far this year.

But in a letter to shareholders, Tesla warned it expects to achieve a production rate of 5,000 Model 3 cars per week late in the first quarter of 2018. Previously, the company had said it hoped to achieve that number by the end of this year.

Tesla shares were down 5 percent in extended hours trading.

Here’s how the company did compared with what Wall Street expected:

• Loss per share of $2.92 vs. $2.29 expected according to Thomson Reuters
• Revenue of $2.98 billion vs. $2.95 billion expected according to Thomson Reuters

During the third quarter, Tesla said it had record net orders and deliveries of its Model S and Model X. The company confirmed it delivered 25,915 Model S and Model X vehicles and 222 Model 3 vehicles during the quarter, for a total of 26,137 deliveries.

Tesla said its production rate of the Model 3 is steadily increasing, but the high degree of automation on the Model 3 production line has proven challenging, said Tesla in the shareholder letter.

“We continue to make progress resolving early bottlenecks related to these issues, and there remain no fundamental problems with our supply chain or any of our production processes,” Tesla said in the letter.

In particular, the battery manufacturing process at Tesla’s Gigafactory 1 held Model 3 production back, Tesla said. Tesla had to take over part of the manufacturing process from suppliers and redesign the process, the company said. Tesla expects throughput to increase substantially in the near future.

The delay in Model 3 production is not likely to dampen demand for the vehicle, said Jessica Caldwell, executive director of industry analysis for Edmunds.

“Model 3 reservation holders may not be thrilled about the fact that they have to wait longer than they thought for their vehicle, but it likely won’t cause them to cancel their orders en masse,” Caldwell said. “Many Model 3 customers put deposits down on the vehicle more than a year ago before they even saw the vehicle, so it’s clear Tesla buyers don’t follow the usual logic-driven car buying process.”

Tesla said that Model S and Model X are on pace for about 100,000 deliveries in 2017, an increase of 30 percent compared to 2016. However Tesla plans to produce about 10 percent fewer cars of both models in the fourth quarter as more resources shift toward Model 3. Inventories of finished Model S and X cars are expected to decline as a result.

The company also expected non-GAAP automotive gross margin to temporarily decline slightly in the fourth quarter to about 15 percent, before recovering in the first quarter of 2018.

In the quarter ended Sept. 30, Tesla reported a net loss of about $619.4 million, or $3.70 per share, compared to a net income of nearly $21.9 million, or 14 cents a share, a year ago.

On an adjusted basis, Tesla lost $2.92 a share, which was wider than expected, according to a consensus estimate from Thomson Reuters.

Revenue rose 30 percent to $2.98 billion from $2.3 billion a year ago.

The company said it has a cash balance of $3.5 billion entering the fourth quarter. Tesla expects fourth-quarter capital expenditures to be about $1 billion, driven largely by payments on Model 3 production equipment, spending on Gigafactory 1, and Tesla’s further expansion of stores, service centers, delivery hubs and the Supercharger network.

Meanwhile, Tesla said it will unveil its Tesla Semi on Nov. 16.

As Tesla continues to focus on increasing production, it is facing some controversy over its relations with its labor force. Tesla fired several hundred employees in recent weeks. The United Auto Workers has filed a complaint against Tesla with the National Labor Relations board over the terminations.

Tesla said it fired the employees based on performance reviews, but some employees and former employees said reviews never took place.

Shares of Tesla have risen more than 50 percent since the beginning of the year. Shares of far larger automaker General Motors have climbed about 23 percent, while Ford shares are up nearly 2 percent.