I've just gotten hold of Baird's March 17 research report, titled "Thoughts from Travel with Management: Raising Price Target to $275". In it Baird raises its price target to $275, as said in the title, and also sets a "blue sky" valuation of $350 per share. Also noteworthy, and as titled, this research report is informed by Baird's travels with Tesla (NASDAQ:TSLA) management.
This is noteworthy, because deep inside the report, away from the headline spotlight, there are disturbing details. And these details, once again, point towards peaked demand for the Tesla Model S, a story I have been harping about for a while now.
Obviously, the intention of this piece of research is not to ring alarms. Perhaps the intention is even to bring down estimates ever so slightly, so as to allow Tesla to jump a low bar. But it's still strange how a research house can put out a piece of research touting a stock while at the same time presenting such low estimates, both versus consensus and versus what one would expect of a strongly-growing company.
The conflicting data
More specifically, what am I talking about? What I am talking about are Baird's estimates for Q1 2014 and Q2 2014, which live in page 22 of the report, away from the spotlight which shines on 2020 throughout the report (Source: Baird research report, red highlight is mine):
These estimates are surprising. They are surprising in several ways. For starters, Q1 and Q2 revenue estimates are well below the Street. The consensus stands at $699.2 million for Q1 and $811.2 million in Q2. Baird projects $628 million for Q2, that's a full 22.5% below the Street.
Then, Baird is seeing $625.8 million in Q1 and $628 million in Q2. That's nearly flat even with Tesla opening new markets such as China! And obviously, again, it implies much lower growth than the consensus (less than 1% versus 16% quarter-on-quarter for consensus).
But it gets worse. As I've been saying the numbers which Tesla has been reporting have been compatible with peaked U.S. deliveries for the Model S, and now even Europe looks weak. This led to Tesla guiding Q1 2014 deliveries (6400) lower than Q4 2014 (6900). But if we use Tesla's 2014 ASP of $109500, from $2,462 billion in automotive sales and 22477 Model S deliveries and apply it to Baird's Q1 and Q2 estimates, this yields around 5700 deliveries in each of those quarters.
Now, 5700 deliveries is:
- Below what Tesla guided Q1 for - 6400 deliveries;
- Well below what Tesla said it was able to produce in Q1 - 7,400 vehicles;
- Well below even what Tesla built in Q4 2013 - 6587 vehicles;
- And implies flat deliveries from Q1 to Q2 even though in Q2 Tesla ought to be delivering cars in China against a backlog.
In short, if Baird is right then the thesis that Tesla was production constrained and that was what was keeping it from growing in the existing geographies goes out the window. And Baird arrived at these numbers by talking with Tesla's management.
Even though Baird might be sandbagging its near-term numbers, the implications are still massive. One has to stick one's head deep in the ground not to see that these numbers conclusively prove that it's not really about production. That indeed Model S deliveries have peaked, and they have peaked because demand cannot sustain a higher rate of sales.
And most importantly, this conclusion is not borne out of my own numbers. This conclusion is borne out of Baird's! Anyway, Baird's report then goes into explosive growth in Q3 and Q4 2014, but nowhere does it explain how Q1, Q2 can clearly be showing flat deliveries well below production capacity, and then by some miracle demand would explode later on.
Obviously, focusing on 2014 can have little influence on what those buying the Tesla story think. They're looking out at 2020, like Baird. Baird sees 48,000 Model S being sold in 2016 and 75,000 Model S being sold out in 2020, among other models.
But think a bit about it. How realistic is it to project strongly growing Model S sales out 2-6 years into the future, when we have been getting data that shows flat or dropping Model S deliveries in existing geographies? Sure, lots of people will again say "that's just because of production constraints". But how could that be if even Baird sees Q1 2014 lower than what Tesla guided for? And even more incredibly, with production capacity already running at XXXX as per Tesla, Baird seems to see Q2 2014 little more than flat with Q1 2014 and still well below Q4 2013?
This, again, is not compatible with production-constrained deliveries. And worse still, having Model S deliveries stagnating this early is not compatible with selling 75,000 Model S out in 2020, never mind the cannibalization which will result from the Model X and Gen.III.
It thus seems that the point here is that a story is being sold even though short-term facts are already saying this story does not hold water.
While Baird's research report sings the praises of Tesla out in 2020, it also shows deeply disturbing near-term estimates. Baird's near term estimates for Q1 2014 and Q2 2014 are compatible with peaked deliveries in existing geographies, and are also massively below the Street consensus.
Baird's numbers were reached in close contact with Tesla's management. If these numbers are reported by Tesla, then the stock is bound to suffer significantly unless the market develops into a freakish bubble that cares nothing about anything.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.