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Why the Model 3 Is So Important for Tesla, Inc.

Tesla's (NASDAQ: TSLA) affordable all-electric Model 3 is finally here. On Friday night, the electric-car maker will hand over about 30 units to customers. Considering the vehicle's $35,000 starting price (about half the price of Model S and Model X vehicles) and Tesla's plans to produce the vehicle in much-greater numbers than previous models, it's doubt that many Tesla investors will be watching the Model 3 event tonight.

It would be difficult to overstate how critical the Model 3 is to Tesla's business. Here's a close look at why Tesla investors need the Model 3 launch to go smoothly.

Model 3. Tesla will unveil its Model 3 on Friday, July 28, at 8:45 p.m. PDT. At the event, Tesla also plans to deliver the first units to customers. Image source: Tesla.

Tesla's Model 3 and Gigafactory need each other

Since Tesla's plan to build its Gigafactory was first announced in 2014, the company has made it clear that the Model 3's launch and the Gigafactory's construction would need to coincide nicely. The battery factory, expected to eventually produce an incredible 35 gigawatt-hours of lithium-ion battery capacity per year, would be an enormous liability for Tesla if the Model 3 were late. Similarly, Tesla won't be able to reach Model 3's target production rate fast enough if the Gigafactory's construction and ramp-up of battery production run behind.

Model 3 prototype outside of Tesla's Gigafactory. Image source: author.

Fortunately for Tesla investors, the Gigafactory's construction, equipment installation, and battery production seem to be on schedule; and Tesla's Model 3 is launching on time.

Tesla expects Model 3 to send vehicle production through the roof

Today, Tesla is producing vehicles at an annualized run rate of about 100,000 units -- a level that Tesla's recent Model S and X sales trends suggest could be the ceiling for demand for the two vehicles. But Tesla expects the Model 3 to drive a surge in demand and vehicle deliveries. Thanks to higher demand demonstrated for its Model 3, the automaker is planning to increase its annual production about fivefold by the end of next year.

Assuming Tesla's Model 3 production ramp-up follows an exponential curve and that deliveries typically lag about a month behind production, Tesla may be able to deliver around 450,000 vehicles in 2018, up hugely from 76,230 in 2016.

Expectations are sky-high

For the most part, investors seem to be pricing in Tesla's ambitious expansion plans. The stock trades with a price-to-sales ratio of about 5.9, far higher than most auto companies' price-to-sales ratios of around 0.5. This raises the stakes for Tesla's execution on launching the Model 3 and ramping up the important vehicle's production.

Tesla vehicle production. Image source: author.

If demand for Tesla's Model 3 falters, or if the company fails to execute on its ambition production roadmap, the stock could take a hit as investors lower their expectations.

Tesla is holding an event tonight to deliver the first Model 3 units to customers and to fully unveil the vehicle for the first time. The event will be at 8:45 p.m. PDT and will be live-streamed on Tesla's website.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.