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Summary

  • The thesis that U.S. deliveries for the Model S peaked remains in force.
  • This is so in spite of Tesla talking about 10% sequential growth in North American net orders.
  • This is also in spite of growth in customer deposits.
  • This fact means that Tesla's 2014 35,000 deliveries estimate is in danger. Unless China/UK/Japan spring a large surprise, such an estimate would probably require growth in the U.S.

As Tesla (NASDAQ:TSLA) starts the day in the red after reporting earnings, people continue to grasp onto any floating debris to keep their beliefs alive. And Tesla, as always, is throwing enough floaters into the sea to keep the faith.

Today, two pieces of flotsam caught my attention. I'll discuss them in this article.

North American demand

By now, the thesis that North American deliveries have peaked is well established. Even analysts comment as much. The following represents the best estimate as to what American deliveries have been since Q1 2013:

Q1 2013: 4900 (Source: Company)

Q2 2013: 5150 (Source: Company)

Q3 2013: 4500 (Source: Company)

Q4 2013: 4000 *

Q1 2014: 3650 **

* The 4000 is a result of overall deliveries reported by the company (6900) minus European deliveries (2900). The Q4 2013 European deliveries (2900) are inferred from 2013 European deliveries (3900) minus Q3 2013 European deliveries (1000).

** Q1 2014 3650 U.S. deliveries are estimated from the previous 3850 U.S. deliveries estimate for Q1 2014, minus 200 or so, which amounts to how much overall TSLA came in below previous expectations.

It's hard to argue that this represents peaked U.S. deliveries. It takes a lot of faith to believe that there's an underlying demand current not represented in these deliveries. But, knowing Tesla investors' predisposition to believe, Tesla's management threw them a bone with the following statement:

North American net orders grew sequentially by more than 10% in the quarter. As always, we are pursuing our expansion through a direct-sales model to accelerate the transition to sustainable transportation. Selling directly allows us to most effectively communicate the unique benefits of electric cars to potential customers, as well as improve the buying and servicing experience.

Suddenly, the struggling speculators had a piece of wood to grab onto. "My God, the peaked deliveries thesis is false, for surely Tesla does not lie onto us!"

Putting aside the fact that delivery numbers in the U.S. are clearly and objectively dropping quarter after quarter, which makes discussing this somewhat unreal, I'll highlight the following:

  • First, Tesla did not say that it was referring to North American net orders for the Model S. This more than likely means that it was not referring just to the Model S, and instead is including Model X net orders in that phrase, rendering it true. For sure, if we include Model X, then net orders climbing 10% sequentially is not that hard - after all, even if Model S net orders were dropping 10% sequentially, you'd just need Model X orders amounting to 20% of Model S orders, or roughly 700 cars, to have net orders for North America rising 10% sequentially;
  • Secondly, it's also relevant that Tesla chose to only comment on sequential orders. Why talk about quarter-on-quarter orders? Why not also comment on year-on-year orders? This has a significant implication: That it's not a coincidence and year-on-year orders are negative, thus keeping the peaked thesis alive.

Either way, the lack of transparency is ominous. But it doesn't matter much; the deliveries estimates speak louder than these hollow pieces of driftwood. Tesla would simply do better to disclose everything regarding orders and sales, instead, Tesla doesn't even break down geographies at this point.

Breaking down geographies is ever more relevant. After all, Tesla is starting to ship cars to China, the UK (right-hand drive) and later in the summer, Japan. Without knowing how many cars are going to these new markets, it's very difficult to gauge how existing markets are doing. But still, with Tesla guiding for 7500 deliveries in Q2 2013, including China and the UK, it seems easy to tell that there's not much in the way of growth for markets ex-China/UK.

Customer deposits

Another source of hope for Tesla fans is the way customer deposits have been growing. Assumptions are stretched to conclude for the best, that demand is exploding, that there are orders for gazillions of cars already in the books. Siddharth Dalal, in his "Tesla Earnings Call Decimates Most Bear Arguments" shows this phenomenon. I quote:

Customer Deposits

Customer deposits is the most overlooked number provided by Tesla and consistently ignored by Tesla bears. However, that is the best number we have from Tesla for actual Model S demand.

We can estimate Model X demand from volunteer trackers at the Tesla Motor Club forum. At $5,000 for a production model and $40,000 for a signature Model, the maximum possible deposit we have for the Model X is about $134 million. Tesla however holds deposits of $198 million, leaving $64 million for the Model S. That is a backlog of over 25,000 cars at a $2500 deposit per car. However, Tesla does hold orders for Signature models in some markets. The Signature order ratio of the Model X is about 12%. If we assume the same for the Model S and that Tesla holds Signature orders for half their market, we have that as 6% for the Model S. This would represent a backlog of over 13,000 for the Model S and that is a lower bound.

With this kind of backlog, any demand slowdown thesis is soundly invalid. From a similar estimate last quarter, the deposits for the Model S were about $58 million.

This seems like solid logic. Take away $134 million for the Model X, and the rest, the other $64 million is Model S. But there's a problem Siddharth Dalal didn't account for. Here it goes (Source: Bloomberg):

Tesla has received several hundred reservations since it started taking orders in August, Veronica Wu, Tesla China's vice president, said in an interview in Beijing today. She declined to provide specific figures, saying buyers need to pay a 250,000 yuan deposit to reserve a car.

There you have it: reserving a Model S cost 250,000 yuan in China, at least until late January. And 250,000 yuan is roughly $40000, not $2500. China has been taking orders since August 2013, and by late January, had gotten "several hundred" reservations, while asking $40000 in deposits for each one. So clearly, a great deal of those $64 million in Model S reservations is from Chinese orders at $40000 each, 1000 of which would consume $40 million. So even customer deposits are wildly misleading regarding the demand for Model S, and certainly don't imply tens of thousands of units yet to be delivered.

Still, with Tesla delivering the first units towards the UK and China, there's still a backlog, which allows Tesla to continue meeting the near-term deliveries estimates. But this is being achieved towards adding more and more markets, not through the expansion of existing markets. Tesla, though, is running out of new markets.

The 35,000 deliveries for 2014 are clearly sounding risky. With 6,500 in Q1, 7,500 in Q2, that leaves 21,000 for Q3, Q4. While Tesla seems able to build those cars, it's not so clear that it will be able to sell and deliver them - as for the first time, doing so would imply having to expand deliveries in existing U.S./European markets, and not just rely on adding new markets (of which Japan seems to be the last large remaining one after Q2 2014).

A positive word

What Tesla has achieved has been tremendous. It took the high-end of the car market by storm and made the leaders pay attention. Certainly, Tesla showed that at the right price and performance, there's a market for EVs. Due to Tesla having proved this, other car makers are forced to respond and field many more EVs and PHEVs.

I need to congratulate Tesla on these achievements, or else it would seem that I was just writing negative gibberish on it. Lest there be no doubt:

  • What Tesla has achieved was tremendous;
  • I hope and believe that EVs will become a large force in the car market.

It's just that EVs becoming mainstream doesn't necessarily mean Tesla ends up the winner. Wild speculation without regard to valuation usually doesn't end well. Still, Tesla has done magnificently.

Conclusion

While Tesla continues to spin North American demand as if it was growing in spite of ever-lower deliveries in U.S. soil, there continues to be reason to believe U.S. deliveries have long peaked.

Furthermore, customer deposits are not a reason for demand optimism, since they include Chinese cars at $40,000 apiece.

Finally, Tesla has done tremendously well and transformed the high-end of the car market. But for now, there seems to be significant limits as to the growth it can achieve with its present lineup, some of those limits being imposed by the very segment Tesla is selling into. With Q3 and Q4 needing to show growth in existing markets, there continues to be a significant likelihood that Tesla won't be able to meet that growth expectation unless China/UK/Japan spring a huge surprise.

Source: Tesla's Customer Deposits, North American Demand And The Will To Believe