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Summary

  • Q2 2014 saw another GAAP loss of $62M with $(0.50) EPS; a whopping 8% of the GAAP revenue of $769M was a loss.
  • Q3 delivery estimates of 7800 were much lower than expected.
  • Quality issues with Model S continue to haunt its reputation.
  • Supercharger expansion doesn’t seem to be lifting sales of the $100K+ Model S.

Tesla (NASDAQ:TSLA) barely beat the estimated delivery of 7549, by delivering 7579 cars in Q2. Also, it projected upbeat deliveries in 2015 and beyond, but much lower guidance of 7800 deliveries for Q3 2014. However, they added a note of caution in their letter to shareholders, with the clause "Provided that we execute well and there are no serious macroeconomic shocks". Since the wording is vague, anything can be defined as a shock, and thus be used as an excuse to miss the guidance numbers.

In the past few days, we saw quite a deluge of selective regurgitation of comments from Tesla's latest quarterly call in the media, including Seeking Alpha. The talks ranged from "Elves at service centers will fix all issues in no time" to "60000 cars will be delivered in 2015". Some even mistook the run rate of 100K/year at end of 2015 to think that 100K cars will be delivered in 2015.

Still, there was an unmistakable tone of caution and skepticism in this very interesting quarterly call. It was apparent in many analysts' comments and questions. Even Mr. Jonas, the ardent pumper of Tesla stock, had to ask the question why many automakers were focusing on fuel cells if Tesla management calls them the 'fool' cells. I'm sure, Mr. Jonas understands that the engineers at Toyota (NYSE:TM) and other large automakers are not fools after all. It appears that Mr. Jonas' hands are tied for whatever reasons to not ask the obvious hard questions.

Quality Issues Continue

There were also some pertinent questions on the poor quality of the Model S sedan that has come to light recently. You can see the whole transcript here. One question from Andrea James focused on Tesla's quality control processes.

Andrea James: "... First one is I guess about quality control. Can you talk about the improvements you've made in quality control and where you think it needs to go? Maybe with a nod toward what's going on with the drive train systems?"

Chairman and CEO Elon Musk's answer was vague at best, and claimed the issues have been sorted out and was only in early model cars. You can read the rather lengthy answer composed of non-cohesive, half sentences on SA's transcript of the earnings call. But that doesn't explain why Edmunds.com's car will have repeated failures, since newer drivetrains were installed just a few months ago before their LA-NY-LA cross country trip. What is more, the replacement drivetrain broke during the replacement process itself! Anyone can guess the quality of these components being installed in the car.

During the earnings call, Tesla also implied that the drivetrain fix is just a $3 cable. However, we don't know if this is a part deep inside the electric motor, or whether the motor or other parts of the car need to be redesigned for this cable. Recall, that the 13 deaths and subsequent recall of Chevy Cobalt caused by ignition switch defects were due to a 57 cent part, but it cost General Motors (NYSE:GM) $1.3B to actually fix the issue.

To make matters worse, Edmunds has recently wrapped up their test of the long-term ownership experience of this car, and it isn't very good. While they made some good remarks about Tesla's attempts to make an innovative product, they concluded that it's not a car they can recommend. This is what Edmunds had to say about their experience:

"Bottom Line: The Model S is a fast, comfortable and technologically brilliant luxury sedan, but numerous problems with its touchscreen, tires and drivetrain make it hard to recommend."

And it appears, Edmunds forgot to mention the expensive battery replacement when their car broke down on the Los Angeles freeway. One of the analysts' questions was right on the mark.

John Lavallo - Merrill Lynch:

"Okay, that's helpful. I guess the second question, recently Edmunds put out a report on I guess their first year with Model S, and obviously everyone has their own opinion on this. But there's been a lot of talk about quality in the call, and what Edmunds was saying, and you may have read it, is that there were something like 28 to 30 service campaigns that were not part of the regular scheduled maintenance, and because of that they couldn't recommend the car. So I mean I'm just curious how you guys might respond to that."

Mr. Musk and CTO Mr. Straubel answered, that the drive unit is a complex module, and that they are replacing it for expedience. But Edmunds' latest replacement was a very recent event, occurring on July 8th, 2014. If Tesla has already figured out that the issue is related to a cheap cable, why would they replace the drive unit 3rd time in their car, knowing that it will be viewed negatively? The simple logical answer would be, they haven't figured out anything and were just trying to allay investors' fears.

In my SA article about 6 weeks ago, I brought investors' attention to the numerous quality issues with Model S that is somehow never mentioned in the populist media. Since then, these quality issues have been the focus at many electric car related blogs and websites. After the conclusion of Edmunds' long-term tests, its results are being increasingly discussed on many independent news agencies and car sites, such as the ones listed below.

Huffington Post : "Elon Musk Defends Tesla After Getting A Terrible Review"

Autoblog: "Edmunds' long-term Tesla Model S has been wonderful, woeful"

InsideEVS: "Real Or Imagined: Is The Tesla Model S Drivetrain Defective?"

The news about repeated failures of this car is just beginning to spread in the blogosphere. Slowly but surely, these will spread by word of mouth and reduce future sales potential of this car. It is also worth mentioning that Tesla recently settled the Lemon lawsuit, lest more quality issues get divulged to the public.

Evidence of slowing sales

Even after expansion into all the major markets and adding over 147 supercharger stations rapidly, Tesla's delivery numbers didn't improve much. In the US, even after the claimed 99% coverage with the supercharger network, it is actually declining rapidly. Now, there are reports that customers can purchase a Model S on the same day. And some report of discounts that are offered on new cars in the stores. And then there is the falling tally of sales in all the established markets. You can see the detailed numbers at this site. In July, Tesla sold only 500 cars in the US, and 114 in Norway, two of its biggest established markets. Tesla sales have fallen sharply from prior quarters, when Tesla was still fulfilling orders from the initial backlog in each market. The RHD markets may give some boost, but none of those RHD markets are big. The UK reportedly has less than 200 Model S sold in July. Hong Kong is likely similar.

So far, all signs indicate sharply lower demand for Model S. In fact, CEO and Chairman Elon Musk openly admitted during the Q2 earnings call that they steer Model X customers to Model S. This wouldn't make sense if the Model S queue was as long as Model X. It makes sense only when there is excess Model S inventory to be sold. Apparently, even the most clever of CEOs sometimes leave trails of truth behind them. We investors just have to look for these trails with a clear lens.

Conclusion

The only evidence we have for the "demand is not an issue" theory is Mr. Musk's own words. But we all know, that Mr. Musk made tall promises in the past, only to delay those promises to some distant future whenever the day of reckoning came. Examples include Model X delivery in 2013, promised price of Model S around $45K, supercharger networks in Canada, delivering promised cars to angry Chinese customers within six weeks of April 22, and so on and so forth. Still, some foolish investors continue to believe his immediate word to be his final on every matter, and are driving the stock price higher with more hope and greed. Even Mr. Jonas expressed surprise on CNBC's halftime report that the stock was doing so well despite a disappointing Q3 delivery guidance. At this point, investors should be very cautious of investing more money into Tesla at current lofty prices, as it may fall abruptly once it runs out of hot air.

Disclosure: The author is short TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please use your own judgment for your investments, and check any suggestions implied here independently. The author is not responsible or liable for your financial decisions. This article is only here to put some facts in the right perspective.