Prior to the open on Tuesday, Tesla Motors (TSLA) announced that Q3 revenues would not meet analyst estimates. The company is having significant problems ramping production and obtaining supplies on time.
Did you catch that part about issues with suppliers? Seriously? Production was half the forecast and only 300 vehicles in Q3, yet suppliers couldn't keep up. That clearly can't be a good sign, as these suppliers must typically deal with thousands if not millions of parts for other automakers.
This is starting to remind me of the Dreamliner plane built by Boeing (BA): an innovative product that took much longer to produce due to the complexities of a new design and a diverse supplier network. The only difference is that Boeing lacks major competition while also having the capital to withstand any setbacks.
The company forecast the following production lowlights for Q3 and beyond:
- The company has only produced 255 Model S vehicles as of September 23rd. The forecast is to exceed 300 for Q3 after producing 77 in the last week.
- The company is forecasting 2,500 to 3,000 Model S vehicles for Q4 with production hitting 400 a week by the end of the year.
- The company still forecasts producing 20,000 vehicles in 2013.
In order to meet the Q4 production goals, the company has to produce at least 200 cars a week on average. Better yet, that requires a 200% ramp from the weekly high in September.
The 2013 forecast might be more feasible than Q4 considering the lengthy time period allowing for a ramp. Especially considering the company expects to achieve a production total of 400 a week by the end of Q4. A 500%+ ramp in weekly production from within 3 months just doesn't appear possible.
If the company is hitting supplier snags at these low volumes, how is it possible for all 200+ suppliers to ramp this quickly? Not to mention, Tesla must eventually face constraints with qualified trained employees and such.
A disturbing trend for investors is that cancellations spiked during Q3. The company claims a total of 13,000 net reservations to date, up from approximately 11,500 at the end of Q2.
The new reservations for Q3 are more than 2,600 to date, but the net reservations for the quarter were only 1,600 leaving over 1,000 cancellations.
While the high cancellations relate to early customers not moving forward with configuring their cars after a lengthy time period, these were suppose to be the most diehard electric vehicle fans.
Another concerning issue is that by the end of 2012, only 80% of current Model S reservation holders in North America will be within 50 miles of a Tesla service center. While the company spins this as positive, it actually appears incredibly negative. That figure likely means 50% aren't within 20 miles of a service center making it just unacceptable.
Debt And Secondary
The company announced a 4.3M follow-on offering of common stock with the option to sell 652K more shares. The roughly 5M shares in total could raise over $130M after fees if the offering prices around $27.
These dilutive measures have always been an issue with Tesla. The company continues to bleed cash and the Department Of Energy apparently wants its loan money back.
The company has now borrowed the full $465M of the loan and apparently needs the proceeds from this offering in order to not violate the loan covenants. On top of that, the company might need to raise more money in order to meet future covenants in 2013.
If the company can meet production forecasts, then some of these issues likely go away. The real issue though remains that future production misses could place the company in a liquidity spiral.
All of these issues bring the focus back to Elon Musk being a part-time CEO. As reported back in April, he was spending a significant amount of time working on the SpaceX rocket launch. Just maybe if he had focused on the suppliers and production efficiencies, Tesla wouldn't be behind on production. One has to wonder when the market will start pressing this issue.
Previously, Elon had been a media favorite and appeared to get a free pass. Now according to the feature run by Bloomberg West, the reporters don't appear so enamored with him anymore, especially after his interview last Friday failed to even hint at any of these dramatic announcements just a few days later.
For investors, the concern has to be that Tesla cut estimates yet again and continued to promise big for the future. The company has too many incentives to continue pressing for production numbers, whether achievable or not, so investors need to be cautious.
Even with the sudden secondary, debt covenant issues, production issues and part time CEO, investors remarkably didn't panic during trading hours. The company continues to over promise and under deliver. As an example, Reuters reports that a year ago analysts expected Tesla to lose $1.73 in 2012. Before this production blowup, analysts were expecting a loss of $2.66. Now that number has to be dramatically lowered again.
Whether the company eventually becomes a huge success remains a big question mark. Investors though need to invest as if the potential exists that the company won't. As Cory Johnson with Bloomberg West states, "Why would anyone believe management of this company any more?"
Investors must still believe the story with stock trading at 60x 2013 estimates that aren't likely to hold up. Until Tesla meets production targets and more importantly exceeds analyst estimates, investors would be wise to steer clear of this potential car wreck.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.
Additional disclosure: Please consult your financial advisor before making any investment decisions.