Tesla Demand Hits The Wall

| About: Tesla, Inc. (TSLA)
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Summary

Drum roll, please. It's time for Q2 delivery forecasts.

Model S is easy, but Model X is tough to pin down.

Model S price cut: your Skeptic says bad news, but Randy Carlson rejoices.

A brief note about Whompygate. And, introducing Pedalgate.

Don't get mad: get your pencils out and make your own forecasts.

Introduction

Time to update Tesla (NASDAQ:TSLA) delivery forecasts.

As always, my data comes from the two most careful Tesla VIN data watchers out there: temagami at the Yahoo Tesla message board and Seeking Alpha's very own Bonaire.

(Demand is not all that's hit the wall. See Part 7 for more on unintended acceleration. Photo by owner, "Puzant")

Both temagami and Bonaire rely primarily on VIN assignments, but also cross-check their conclusions against other data.

Now, I grant you, they could be missing something, and be completely wrong. It's never happened before, but there's always a first.

So, with that caution in mind, here's what they see:

Demand for Tesla cars is weak. It's bad for the Model S. It's worse for the Model X.

With the handwriting already on the wall, Elon Musk has a decision to make between now and the Q2 conference call: go ahead and guide lower for the year, or (as in past years) wait until the Q3 earnings report.

Place your bets.

1. Model S Q2 Forecast

Here's what the VIN data looks like when charted as a daily and weekly average since the start of 2015:

(June data through June 16)

I'm not seeing any sustained upward trend there.

The 90-day rolling average for Model S VIN assignments has stuck close to 13,500 for the past several weeks. So, let's go with 13,500 Model S builds in Q2.

How many of those cars will be delivered? Tesla has replaced a lot of showroom vehicles, and we speculate Tesla has built a number of inventory cars from the remaining "classic" parts.

So, we'll estimate a 1,500 car net addition to inventory, which gives us a total of 12,000 Model S deliveries.

At 12,000 deliveries, this will be the second straight quarter in which Model S deliveries fall short of the Q4 2015 figure.

What about the recent price cut which - taken together with what is effectively a $1,000 rebate - has dropped the price of the entry level Model S by $6,500? Won't that help?

No doubt it will juice demand; however, the results likely won't be visible until Q3.

One word of caution: there's an anomaly that may throw off our forecast. In late March and early April, the VIN numbering jumped across a large gap. According to temagami, these types of gaps occasionally appear, but typically are filled in with later-arriving data. Not this time.

And yet, the sequence picked up again right on the trend line.

So, the VIN gap remains an anomaly for which we cannot account, and one which could conceivably throw off our forecast.

2. Model X Q2 Forecast

The Model X is a more elusive target.

The cars are being built and delivered totally out of sequence; however, the Q2 VIN delivery "waterline" is shaping up to be right around 8,000.

We know that 2,614 were delivered by the end of Q1. So, we begin with 5,400 deliveries and adjust from there.

How many are for showroom or demo use? Several hundred for sure. Let's say 300.

How many destined for Canada or Europe will not arrive in time to qualify as a Q2 delivery? Few to none.

How about China? That's impossible to say. We think there could be problems distributing cars in China. It's purely a wild guess, but we figure that 200 cars with VINs below 8000 spill into Q3.

OK, so we're down to 4,900 deliveries (and also right at Tesla's delivery guidance).

But the huge question remains unanswered: Do the 8,000 VINs include Signatures and Founders? If not, then we need to add in about 1,300 more deliveries.

So which is it? Without getting into the weeds, suffice it to say we see evidence both ways. In Q2, we could see 4,900 MX deliveries, or we could see 6,200.

Okay, you're going to force me to choose? Fine, then, I'll assume Tesla's 17,000 delivery guidance was on target, and go with 4,900.

3. Model X Forecast Beyond Q2: Dropping Off a Cliff

The real bad news about the Model X deliveries is not that Q2 deliveries will be, at best, 6,200. The real bad news is that Q2's delivery number, whatever it is, will be as good as it gets.

Since last September's "reveal," net new orders worldwide appear to be coming in at the rate of about 250 per month.

Unless something changes, and changes soon, Tesla will burn through its remaining backlog in Q3, and it's downhill from there.

(Model X falcon wing door problems persist)

Model X price cuts ahead? Don't be surprised.

4. CPO Cars

Tesla doesn't include CPO sales in its delivery guidance, and so we would have no way of checking our prediction even if we made one. Which we won't.

I continue to be puzzled by the paucity of CPOs on the CPO-EV Consolidator. My theory continues to be that Tesla has many more CPOs than it's listing, and is holding them back for fear of creating further downward pressure on new car prices.

Sure, that's just my theory. And when it comes to Tesla, I'm just a big Eeyore. But my theory is consistent with new car "deliveries" being Tesla's most magic metric.

Yes, the used cars only depreciate further every day they sit in some garage. But meanwhile, on the balance sheet, they carry the full value Tesla paid for them.

The time to pay the piper will be only down the road, when Tesla sells them.

Would Tesla sacrifice profits just to emphasize deliveries? You can have your answer; I have mine.

5. A Note About Model S Margins

What effect will the recent Model S rebate and price cut have on Tesla's gross margin?

To me, there's just no way around it: it's bad news. Tesla has just trimmed its gross margin by $6,500 per 60 kWh Model S sold.

But there are other views. For instance, Seeking Alpha contributor Randy Carlson, who is certainly an expert on Tesla battery technology and may have something of an inside track on technological developments, believes the price cut reflects a crucial chemistry breakthrough.

Per Carlson, this is not only benign for Model S margins, but also bodes well for Model 3 pricing:

This is an extremely important, extremely revealing development that points to cell chemistry improvements that will be key to Model 3 / Gigafactory success.

The ONLY way to change battery capacity with an over-the-air update is to change the voltage range over which the battery operates. This change in offerings suggests that the original S60 pack size (i.e. number of 18650 cells) has been increased in capacity from 60kWh to 75kWh and that at least some of that increase is due to operating the battery at higher voltage per cell. This in turn implies an improved, higher voltage tolerant electrolyte formulation.

An increase from 60kWh to 75kWh with the same pack size is a 25% improvement in battery performance over the original S60 / S85 battery chemistry. To achieve a Model 3 design that is both lighter and less costly than comparable performance BMW 3 Series ICE cars will require batteries roughly 40% better than the original Model S. This means we need to see an additional 15% improvement (in cell performance in delivered cars) over the next 18 months. In as much as we have seen a 25% improvement over less than 12 months, it looks like battery technology for a successful Model 3 is well in hand.

See also here and here.

Carlson promises an article with all the details soon. Perhaps it will already have been published by the time you read this. I strongly encourage all Tesla investors (especially the bears) to read it.

What Carlson has to say may cause me to revise my opinion. Right now, though, my view is that if Tesla had achieved some great breakthrough, it wouldn't be bashful about announcing it.

Consequently, my working hypothesis is that the Model S price reduction will cut deeply into Tesla margins and further exacerbate its operating losses and cash burn.

6. Will the Model S Price Cut Affect CPOs?

A poster at the Yahoo Tesla message board named kbodie77777 posited the following:

Tesla owns VIN = P09554 = it's a 2013 Model S60 with 38,000 miles. Tesla wants $50,295 with limited warranty. This car has 38,000 miles of wear and tear and it is the old style car.

Compare that to a brand spanking new 2016 Model S (60 kWh) for which Tesla wants $66,500 (with new car warranty), which you can customize as you please.

This is the new style Model S with the face lift. And it's only $16,205 more than the old Model S60 that Tesla owns.

BUT WAIT - This deal gets better. The new car qualifies for $7,500 federal rebate check so the net cost is really only $58,700. That's only $8,405 more for an updated ultra clean NEW car.

BUT WAIT - the new car also qualifies for $2,500 California rebate. Now the cost of the new car becomes only $5,905 more than the old 38,000 mile used car in California.

Conclusion: You would have to be very silly to buy the CPO car. It is likely Tesla is going to lower the asking price of the CPO units dramatically.

Agree or disagree, it's something to think about.

7. After Whompygate, Pedalgate?

The debate rages on about Ralph Vader (Keef, Keith) and his whompy wheels.

In the briefest of terms, here's my view:

(1) there's likely no problem;

(2) Ralph committed no fraud in making his reports to the NHTSA;

(3) Tesla was wrong to seek non-disclosure agreements;

(4) for safety's sake, the NHTSA should look into the matter; and

(5) if after doing so, it concludes there's no problem, Ralph should cease and desist.

An interesting ancillary item has come to light thanks to Seeking Alpha member bubslug, who has done some first rate investigation, albeit with limited resources.

Tesla cars appear to have an extraordinarily high rate of unintended acceleration incidents. The exchange involving this issue can be found here (and in the immediately preceding comments) and is worth reading.

As bubslug would be first to agree, it's all very tentative, preliminary, speculative, and unproven.

But, admit it. It's intriguing.

And with that we're off.

Vrooom!

8. One Final Thing: Your Forecasts, Please.

Instead of using the comments to tell me how dense I am, perhaps you might share with all of us your forecasts for the following:

  1. Q2 Model S deliveries
  2. Q2 Model X deliveries

All entries must be in by noon (Mountain Time) on Monday, June 20. Winners to be announced in July!

First prize: a Montana Skeptic coffee mug. Second prize: two Montana Skeptic coffee mugs.

9. And One Final, Final Thing

You can follow me on Twitter @MontanaSkeptic1 (which I mostly use to announce the publication of each article).

And, here's someone else you should consider following on Twitter, especially if, like me, you're bearish on Tesla: @johnvoelcker.

I can imagine you’re thinking, “Hey, wait a minute. That Voelcker guy is the editor of GreenCarReports.com. His publication has lots of nice things to say about Tesla. You probably don't agree with him about most things."

Yeah, that's right. That's why I like following him. Besides being fun, informative, and literate, he has a very different viewpoint from my own.

A Note About My Contributors

Bonaire and temagami, willingly. Bubslug and kbodie77777, whether they like it or not.

Wise thoughts and moral support: cbx6cylinder and retire_yung at the Yahoo Tesla message board and investor.gator here.

None of them necessarily agrees with everything I say. And all the mistakes are mine.

Disclosure: I am/we are short TSLA VIA LONG-DATED PUTS.

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.