• An “internal” email written by Musk was leaked today with details around how Tesla can hit Model 3 production goals for the June quarter and measures to increase profitability and internal efficiency.
• This makes us more confident in Tesla’s ability to ramp Model 3 production to a level that will satisfy investors in the Jun-18 quarter.
• Tesla will be pausing Model 3 production for retooling. While this sounds bad, it’s actually a good thing.

There are 6 key takeaways from this lengthy memo:

• Model 3 production over the past 3 weeks has been 2020, 2070, and 2250 respectively, and has increased by 10% since reporting earlier this month.
• Production is on pause for 3-5 days for comprehensive upgrades that should result in 3-4k Model 3’s per week next month.
• Production will pause again in May and result in capacity (not production) of 6k per week by late June.
• The reason they’re shooting for 6k per week is to allow a margin of error towards the goal of 5k per week. We’re modeling Model 3 production of 4k per week exiting Jun-18.
• Fremont factory is moving to 24/7 operations, but timing is unclear. To make this possible they will be hiring ~400 people per week for several weeks.
• Musk is taking a more active role, requiring personal approval of expenses over $1m, and demanding streamlined internal communication.

Model 3 production pause sounds bad but is actually a good thing. The headline that production has been shutdown suggested that there was something wrong with the design and or production of the car. As outlined in this memo, production stoppages serve to provide time for upgrades to the line which should result in increased output. This is necessary to scale Model 3 production from its current ~100,000 cars per year rate to just over 500,000 per year during the next year and a half. Tesla has been clear that the ramp in Model 3 production will grow exponentially in a stairstep pattern, not linearly.

Why investors will likely continue to support the Tesla story. The last 6 weeks have been a wild ride for Tesla investors. Shares have declined 27% and rebounded 15% as investors digested a range of Tesla news including Model 3 production miss in the March quarter, a debt downgrade, an accident that called into question the integrity of Autopilot, the company projecting they will not need to raise capital in 2018 and now a Model 3 production pause. In total, during that period, there have been four negative stories and one positive story. Given this negativity, it begs the question, how long will investors continue to support the Tesla story. We think the answer is a long time. Core Tesla investors are less interested in the week to week news cycle and more interested in finding companies that have open-ended growth opportunities. Despite all of the hair on the Tesla story, the company remains ideally positioned for growth around the themes of renewable energy, storage, electric vehicles, and autonomous transport. We believe, given the size of Tesla’s addressable markets, that investors will remain committed in the form of holding shares and participating in future fundraising.