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Is Tesla's Model 3 Likely to Sink the Company?

The California electric car maker could see the bottom drop out after third-quarter earnings disappointed.
Image: Tesla Motors Inc. Chief Executive Officer Elon Musk Unveils New Generation Of Batteries
Elon Musk, co-founder and chief executive officer of Tesla Motors Inc., speaks during the unveiling of the company's "Powerwall' at an event on April 30, 2015 in Hawthorne, California.Tim Rue / Bloomberg via Getty Images file

Few companies have done a better job of defying gravity than Tesla, but the California-based electric carmaker could see the bottom drop out, some observers are warning, after Wednesday's worse than expected third-quarter earnings report.

Tesla rolled up a July to September deficit of $2.92 a share, well below the $2.45 a share deficit that a consensus of industry analysts had forecast. On the plus side, revenues for the latest quarter slightly beat expectations at $2.98 billion versus a consensus figure of $2.95 billion.

One reason for the weak numbers was the trouble Tesla has been having with the launch of its Model 3, the company’s first mainstream battery-electric vehicle. While final sales figures weren’t released, industry sources said the figure was expected to be in the “low three-digit” range, meaning the much-anticipated model was vastly outsold by General Motors’ own affordable, long-range battery-electric vehicle, the Chevrolet Bolt, which hit a record 2,781 sales in October.

“The Tesla Model 3 is a dud,” declared Harris Kupperman, the president of hedge fund Praetorian Capital.

The sluggish rollout of the Model 3 hasn’t been due to a lack of demand. The company has more than 400,000 advance reservations, but has been struggling to boost production after falling into what CEO Elon Musk has dubbed “production hell.”

"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 a letter issued to shareholders on Wednesday afternoon.

While not everyone is ready to write off the new car, it's clearly off to a bad start. During the first three months after its July launch, Tesla produced just 260 Model 3s, less than 20 percent of its 1,500 target and far worse than expected.

Plenty of automakers have seen new models get off to a bad start, only to turn around later. But the problem for Tesla is that things at its Fremont, California plant may not go well for a while.

The automotive trade magazine Ward’s quoted a Tesla source who said, “I can’t see them reaching 2,500 to 3,000 weekly until the end of next year.” If true, that would mean Tesla will likely produce several 100,000 fewer of the sedans than promised in 2019.

By then, a new report from automotive analysts at UBS warns, “competing EVs are coming, and a long delay could reduce (Tesla's) market share opportunity." The Chevy Bolt EV is being joined by a number of mainstream and high-line, long-range BEVs this coming year, including a second-generation Nissan Leaf and offerings from both Volkswagen and Audi.

Further fraying the bottom line, Tesla has been forced to cut prices and boost incentives to keep sales going for its premium products, the Models S and X.

The Model X, in particular, remains a sore spot for Tesla. The battery-SUV was more than two years late to market in 2015 and continues to have serious quality issues. In its annual Automotive Reliability Survey released on October 19, influential Consumer Reports magazine declared that the Model X tied with the Cadillac Escalade as the most problem-plagued products on the U.S. automotive market.

The turmoil at the Fremont plant has been compounded by recent mass firings. The company said it let hundreds of employees go from its motor division because of what it described as “performance issues.” But the National Labor Relations Board is questioning that claim, spurred by complaints filed by the United Auto Workers Union alleging many of those fired were actively involved in an organizing drive.

Long the darling of Wall Street, Tesla still has its admirers, though a growing number of analysts have begun to issue “sell” advisories.

Related: Musk Warns of 'Production Hell' for Model 3

Shares of TSLA reached an all-time high of $385.00 on September 18, giving Tesla a market capitalization well in excess of General Motors despite selling barely 1 percent as many vehicles and having run deficits in all but two quarters since going public.