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One of the most amazing things about Tesla (TSLA) is the way people seem willing to ignore whatever numeric info is available, to instead believe in unsubstantiated tales. As is to be expected with confirmation bias-induced reactions, speculators are able to latch on to any information which somehow seems to confirm their bullish views, instead of taking a hard look at the available data.

For instance, the stock has jumped significantly due to the announcement that Tesla made 6900 deliveries in Q4 2013, versus the previous guidance of 6000. At the same time, we've long had clues the U.S. deliveries have stagnated. These clues have been present since Q2 2013, but have been mostly ignored by the market on the basis of faith. Faith that the stagnation is only apparent due either to the backlog of orders, or due to production constraints.

For this reaction, it didn't seem to have mattered that Q3 2013 production already seemed to be around 7000 cars (550 cars per week / 7 * 90), so deliveries of 6900 cars one quarter later were not incredibly surprising. But all that mattered was that Tesla first guided for 6000 deliveries and then produced 6900 deliveries… and this was made even stranger by the way a 15% beat of its own guidance was described as a 20% beat (Source: Tesla PR, bold highlight is mine):

PALO ALTO, CA -- (Marketwired) -- 01/14/14 -- Tesla sales in the fourth quarter of 2013 were the highest in company history by a significant margin. With almost 6,900 vehicles sold and delivered, Tesla exceeded prior guidance by approximately 20%. A higher than expected number of cars was manufactured as a result of an excellent effort by the Tesla production team and key suppliers, particularly Panasonic.

Tesla is now preparing to report on Q4 2013 and guide for Q1 2014 and 2014 as a whole (the report is expected for February 19 after the market closes). As Tesla does this, it will suddenly become more obvious that demand on existing geographies is peaking, and at some point, it will remain impossible to ignore this development. It is my view that this earnings report might be the one where such stagnation will become readily apparent. In this article, I will explain why.

U.S. deliveries have evidently stagnated

First of all, U.S. deliveries have already peaked since Q2 2013. These are the reported deliveries for U.S. and California (largest market within the U.S.) for the last 4 quarters (U.S. Q4 is estimated):

U.S.

Q1 2013: 4900

Q2 2013: 5150

Q3 2013: 4500

Q4 2013: 4000*

*The 4000 U.S. delivery estimate for Q4 2013 results from overall deliveries of 6900 minus 2900 units delivered to Europe. The 2900 Europe delivery number results from 3900 sales in Europe for 2013 minus 1000 delivered in Q3 2013 (Source for 2013 European sales: EVobsession.com).

California

As per my previous article, and according to data from California New Car Dealers Association:

Q1 2013: 2406

Q2 2013: 2308

Q3 2013: 1840

Q4 2013: 1793

Faith that this does not reflect demand

Obviously, those long the stock believe something else is responsible for those drops in deliveries. They believe that the falling deliveries, no matter how consistent, are dictated by either the effects of backlog on the earlier quarters or by production constraints in the later quarters. Both of these can theoretically be used to explain the observed drops.

However, both also require increasing doses of faith to keep on explaining such ongoing drops. This is how the logic works (the numbers used are purely speculative, the objective is just to show how the logic goes).

Backlog

The logic here is that early deliveries are inflated by an existing backlog. As the backlog is eaten away, more and more of the deliveries are explained by underlying demand. A chart would look like this (red = backlog; blue = underlying demand):

As we can see, it's possible to produce a rising chart for demand while respecting the overall drop in deliveries.

Production-constrained

As we go forward, however, the previous logic leads to a disappearing backlog. To keep on believing that demand is not peaked already, one needs to change explanations. Hence the logic that Tesla is now production-constrained, and in order to serve its geographic expansion to Europe and China, it needs to starve the U.S. market.

In essence, this means that Tesla is allocating fewer and fewer units to the U.S. market in order to serve other markets.

So the question here is, what development would either validate or invalidate this new thesis? That's where the Q4 2013 report becomes important, particularly the part about forward Q1 2014 and 2014 guidance. It's easy for the company to guide 2014 towards to the expected 35,000 or 40,000 deliveries since those don't need to be produced immediately, but doubts quickly crop up if near-term Q1 2014 guidance reflects stable or lower deliveries.

Production per week

The question is due to the fact that Tesla is supposedly already producing the Model S at 650 cars/week. So guiding towards 35,000 cars per year implies no production growth for the entire year.

Furthermore, after delivering 6900 cars in Q4 2013, there's some chance that it will deliver only as many, or even less, during Q1 2014. And this would directly contradict the production-constraint thesis! People would quickly say "seasonality", of course. But think about it, seasonality is not something you expect to happen in the second year of a fast-growing company.

So at this point, Tesla is able to produce in excess of 8000 cars per quarter, and it probably already was able to produce around 8000 cars per quarter in Q4 2013. Q1 2014 thus becomes crucial in understanding if U.S. deliveries are dropping because of production constraints or because of materially lower demand. And once Tesla guides towards Q1 2014 deliveries, we might be able to directly understand this without a shadow of a doubt, because the overall guidance might already imply stagnation from Q4 2014 in spite of larger production capacity.

The risk

Why do I believe this risk is real? Why do I believe Tesla might guide towards Q1 2014 deliveries in line with Q4 2013 deliveries in spite of larger production capacity? My opinion stems from the fact that we already have some data for January 2014. And it doesn't look pretty.

Norway

As we saw earlier, Tesla delivered around 3906 cars in Europe for Q3 2013 and Q4 2013 put together. Out of these 3906 cars, Norway was the largest market by far, accounting for around 1979 deliveries. Of these, around 1178 were in Q4 2014.

It's not surprising that the Model S sees such large deliveries in Norway, due to the massive tax breaks it enjoys there. But most importantly, the drop for January 2013 has been significant, with only 132 registered deliveries. This puts it on track to see less than 500 deliveries for the quarter, whereas it had more than that just in December 2013. Things might improve in February and March, but there's the real chance that Norway will see lower deliveries overall for the quarter.

Netherlands

The Netherlands is yet another large foreign market for Tesla. It answered for 1195 units during 2013. Together with Norway, these two markets represented 81.2% of foreign deliveries.

So what's the problem here? Well, we have January 2014 data on Netherlands as well, and it doesn't look pretty. Sales dropped to just 7 units! This is probably not representative of overall deliveries in Netherlands for Q1 2014, but still it will be (very) hard for those deliveries to exceed Q4 2013.

Again, the incentives to buy an EV in the Netherlands are significant, being valued at up to $8200 per year as per Wikipedia.

U.S.

Finally, though it's just a rough estimate, there is data for U.S. deliveries in January as well. These stand at around 1000 units. Remember, Q1 2013 saw backlog-inflated deliveries of 4900 units, but even Q4 2013, with no backlog influence, saw 4000 estimated deliveries. So 1000 in a month, especially when the largest foreign markets are seeing low deliveries, is not consistent with production constraints.

And this is the problem

At the moment, with the data we have, all the largest markets (U.S., Norway, Netherlands) seem to be seeing lower Model S sales in January 2014 versus their Q4 2013 pace. Since production capacity is always expanding, there is no reason to think that production-constrained demand can be lower from one quarter to the other. So if Tesla somehow guides for flat or lower deliveries in Q1 2014, we have to genuinely ask why.

The only possible explanation, at this point, is peaked demand.

Putting it all together

What do we know? We know that:

  • Tesla exited Q4 2013 able to produce around 680 vehicles/week. For the sake of being conservative, I considered 650/week, which makes for possible production of 8350 vehicles in a quarter;
  • Tesla delivered 6900 Model S in Q4 2013. Of these, 4000 were U.S.-bound, and around 1150 were bound for Norway and the Netherlands. So these 3 markets accounted for around 91.3% of Q4 2013 Tesla Model S deliveries;
  • In January 2014, Norway saw just 132 sales, the Netherlands saw just 7 sales, and even the U.S. is estimated at just 1000 sales. All of these sales numbers are at this point consistent with a Q1 2014 sales pace that's lower than Q4 2013.

Obviously, Tesla shares are not priced for lower sequential sales, and the "production-constrained" thesis/excuse is not consistent with lower sequential sales either. So if Tesla somehow reports flat-to-lower delivery guidance for Q1 2014 versus Q4 2013, the thesis regarding the production constraints is invalidated.

There is a slight wildcard here in China deliveries, which started in Q1 2014 and might provide some upside. There is still some doubt on whether Tesla will break down delivery statistics so that China's influence can be gauged.

Not everything is bad

While there are signs of demand weakness all over, there's also a catalyst which will favor Tesla's Model S in California from around the midpoint of the year. This will happen because the Green CAV decals will be reaching their 40,000 limit.

How is this relevant for Tesla? Well, hybrids like the Toyota Prius or the Chevy Volt use these decals to be able to access HOV lanes, thus bypassing some of the worst traffic. At the same time, Tesla Model S and other full-EVs like the Nissan Leaf use White CAV decals with no limits.

So when the Green CAV decals are exhausted, the pure EVs will become much more competitive with hybrids since only those will still be able to sell new vehicles able to access the HOV lanes. This will favor Tesla Model S demand and value. It will also favor the Nissan Leaf, while it should lead to a drop in demand for Toyota, Chevrolet, and others which only field hybrids.

Conclusion

Incoming data for January 2014 Model S sales in Tesla's main markets again call into question the thesis that Tesla is production-constrained. The publicly available data regarding January 2014 sales implies lower Model S sales on all of Tesla's main markets simultaneously (when sequentially compared to Q4 2013).

With Tesla's Q4 2013 report, we'll get guidance for Q1 2014 as well as for the whole of 2014. If this guidance is somehow flat or down from Q4 2013's 6900 units, then the production-constrained thesis fails. If this happens, the stock might well suffer considerably. There is thus, tremendous risk in the earnings release for TSLA longs.

Source: Tremendous Risk Awaits Tesla Investors In Q4 2013 Earnings Release