Tesla Faces A Large Revenue Consensus Cut

Summary

• Tesla is likely to either miss Q3 2017 (not Q2!) revenue consensus or analysts will have to cut it significantly before we reach that report.
• The article explains why, using optimistic assumptions which favor Tesla.
• In reality, the shortfall I calculate here is likely to be a lower bound for the actual shortfall.

Still looking pretty. However, many aspects are outdated and the model will need to be replaced, without ever having paid for itself. And that was on a near-free factory, to boot.

Tesla’s (NASDAQ:TSLA) Q3 2017 revenue consensus will be cut in the next couple of months. Most likely, this will happen just as Tesla reports on its disastrous Q2 2017.

The reason for me saying this is very easy to explain. Let me summarize it:

• The present consensus for Q3 2016 Tesla revenue is $2.82 billion (Source: Yahoo Finance).

• During Q3 2016, Tesla delivered 24,821 Model S + X. This allowed it to show revenues of $2.3 billion, including service and other revenues.
• Those Q3 2016 revenues did not include SolarCity. Solarcity allowed for another $214 million in revenues during Q1 2017 (including minimal revenues from energy storage).
• Those Q3 2016 revenues did not include Model 3 revenues. If Tesla delivers 1,000 paid Model 3 during Q3 2017, this would allow for another ~$60 million in revenues.
• Tesla’s service revenues are increasing and we can model $60 million more in such revenues during Q3 2017 versus Q3 2016.

However, here’s the problem: Tesla’s Model S and X constitute most of Q3 2016 revenues. Tesla delivered just 22,000 of these vehicles during Q2 2017, and guided for H2 2017 deliveries of around the same as during H1, which was ~47,000 vehicles. Already:

• The H2 2017 guidance implies no sequential growth from H1 2017 or year-on-year growth from H2 2016.
• The guidance implies an average of 23,500 Model S+X per quarter during H2 2017. 23,500 is lower than the deliveries Tesla had during Q3 2016 (24,821).
• Moreover, typically Tesla’s sales will be slanted towards Q4 versus Q3. 2016 was the exception. This has a reason to be: there are usually fiscal incentive changes near the end of the year, which prompt temporary demand. So, even those 23,500 average quarterly deliveries look aggressive.
• They also look aggressive if one considers that Tesla entered Q3 2016 with 5,150 cars in transit, which constituted 20.7% (a low for the past 4 quarters) of the cars it ended up delivering in the quarter. This time, Tesla enters Q3 with just 3,500 cars in transit.

The result of the above is that even 23,500 Model S + X deliveries are difficult for Tesla to attain during Q3 2017. And even those, again, look aggressive if we consider the increasing Model 3 cannibalization which is sure to happen.

However, we’ll be generous here. 23,500 is very hard for Tesla, but we’ll consider the same Automotive revenues (plus those additional 1,000 Model 3) as Tesla attained during Q3 2016. What does that leave us with? Let’s see:

• $2,298 million in optimistic S+X+service revenues (same as Q3 2016).
• Plus ~$220 million in Solarcity revenues.
• Plus ~$60 million in optimistic Model 3 revenues.
• Plus ~$60 million in additional service revenues.

This adds up to $2,638 million. Of course, the consensus stands at $2.82 billion, so this is a $182 million shortfall, or 6.5% of consensus – which needs to be cut.

Conclusion

Even if we optimistically assume that Tesla will somehow attain the same Model S+X sales in Q3 2017 as it did on Q3 2016, we still see that Tesla will miss Q3 2017 revenue consensus by a large margin. This revenue consensus will thus need to be cut.

Moreover, the assumptions really are very optimistic, because Tesla is coming from a quarter where it consumed 1,150 cars in transit to deliver just 22,000 cars. It thus starts Q3 2017 with lower sustained demand than 22,000 cars per quarter, as well as 1,650 fewer cars in transit. Tesla isn’t thus likely to reach the 24,821 Model S+X cars delivered during Q3 2016. As a result, the 6.5% revenue shortfall is something of an lower range for the shortfall.

Analyst’s Disclosure: I am/we are short TSLA. 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.

Comments

[Paulo Santos]

Well, the USD is down so much that it's going to plug a great deal of the revenue shortfall, as long as TSLA can deliver the cars.

[Sailorforlife BESTTI]

I feel as Musk is managing the stock price. it is never good to see this sort of stuff. IMO he's no Steve Jobs. @jack is more Steve than him. I was a long time shareholder until I noticed this issue with Musk. it's a lack of confidence that leads CEOs to care as he does.

[john.fAIrplay]

Stock tanking again today - now down $66 a share in less than a month. Time's running out.

[wyoming willlie]

it's just catching its breath, it'll be over$450 after the earnings report

[User 47429802]

$460.

[User 828881]

$1060!!!! Super awesome losses will suddenly be seen as bullish due to volumetric accounting......

[Gordonr]

Whatever happened to the Gigafactory Pokeyman village conspiracy?

When the whole factory was a fake.
Guess that was last years fake news.

[NiceWhileItLasted]

@Gordonr,

<< Whatever happened to the Gigafactory Pokeyman village conspiracy?
When the whole factory was a fake. Guess that was last years fake news. >>

Evidently. But I believe that was "gigglefactory."

[Big Weasel]

Indeed, whatever happened to that Potemkin factory? It's still incomplete, still not teeming with vertically integrated sub suppliers, still not powered by renewables...it was supposed to be on the "critical path" for Model 3 manufacture, remember?

[Paulo Santos]

We're nearing October 2017 and it's at what, less than 1/3rd the size it was supposed to be by October?

[jerry-j]

test

[Jimboree]

After this stock tanks, it will be studied at both B schools and in Econ 101?
Not only was the corporate governance appalling, Fidelity's decision to ignore the misses and hold its position in such a huge, profitable trade will lead to an interesting evaluation of its risk management policy. I also assume heads will roll at Fidelity. Yes, I concede I could be wrong but it seems that I'm looking at a gambler who insists on leaving winning chips on black at the roulette wheel. And they did with Enron as well.

[The Loomer]

I've never seen anything like the emotional outbursts of the investor who is short Tesla. They are furious that this company has done so well, and been such a boon to its longs. Keep on huffing and puffing you Big, Bad Bears. Tesla is about to drop its biggest winner on you yet. And Paolo, for a guy who's never been right once about this stock, you sure do put on a confident front.

[john.fAIrplay]

"They are furious that this company has done so well"

I think it's more in the vein of a different definition of "well." For most people, losing billions of dollars doesn't qualify as "well."

[User 828881]

Cool story bro - ever wonder where the term "bull market genius" came from?

[Vikram Angrish]

Tesla had a 100kWh pack snafu and made a bunch of inventory 75's in their place and there is likely a 100D jam for Model X now.

Basically they will build and sell ~25,000 cars a quarter at the Economic quantity for the line. I expect 25,000 cars sold in Q3. 2.8B consensus looks like ballpark.

[Paulo Santos]

The 100kWh pack excuse is unreal, because Tesla itself said it was producing 100D/P100D cars for its own inventory. Indeed, you'll notice that to hide this incongruity, the latest letter says that they built the top models but doesn't call them by name (so as not to show they had the 100kWh battery which supposedly delayed the whole delivery thing).

Also, it makes no sense to say that the problem was production, but:
* Lots of cars were built for inventory.
* Cars in transit fell.

If there was a problem delaying deliveries, cars in transit would have risen instead of them being built for inventory (which they were).

[slevental]

The situation with Tesla is simple: the demand is infinite because of the extremely high quality/reliability so that is why the deliveries went down from 25k in q1 to 22k in q2 and that is the reason to the big discounts that Tesla offered on the cars in q2. Simple. To demonstrate how extremely satisfied Tesla buyers are, see the following video
http://bit.ly/2vrA44F

[Bonaire]

That example is what it is like to move from "Cult to Consumer" in a market segment.

[solucky]

" Here is a global survey that says 40% of respondents will likely buy an EV in the next 5 years."

Me too if i get an better product for the same price

[Bonaire]

I don't need to buy an EV in the next 5 years. I bought a 2011 Chevy Volt and it will last a long longer than 5 more years.

[belz]

The trend is what is important.

Here is a global survey that says 40% of respondents will likely buy an EV in the next 5 years. Production constraints will make that difficult, but time will make it a reality.

http://bit.ly/2vrbosN

[john.fAIrplay]

40 percent of people won't even buy a new car in the next 5 years.

[User 828881]

LOL was that a sample of 100 people in San Francisco or a sample of Elektrek readers?

[samdehne]

You guys are full of beans.
DO YOU THINK YOU KNOW MORE THAN THE
GOVERNOR OF NEVADA.. ELON'S RIGHT HAND
MAN. Watch them talk, then make your comments:
http://bit.ly/2vqQSIP

[belz]

Samdehme,

Wow, quite the statement! Tks

It makes Montana Skeptic use of Galileo's picture shameful.

[Democracy in America]

There is fundamental business analysis that shows that TSLA has no clear path the GENERATING Free Cash Flow

Bulls compare it to AMZN - fine but has it AMZN is a completely different model ...be intellectually honest

I can easily say it is like MCI Worldcomm...the more rev that comes in, the more it loses

Solar City is a negative FCF drain

[Dansplans]

What is scary for Tesla going forward are those like the guy who has bought 3 model S and 1 model X over several years, but has gotten fed up, and sworn off Tesla forever. The only reason that Tesla has survived this long is because of the rich, multiple Tesla buyers. Without this core group, with deep pockets, Tesla doesn't stand a chance.

[Bonaire]

Gather a few thousand together. Get them to buy stock at $20-30. Get them to order product behind that stock. Run the stock up. $50, 80, 110, 161.88.
They buy product A, then intro product B, then reveal the D. Then, new Ludicrous mode. By the end of it you have stock gains of these thousands of people in the Millions of dollars. Many will buy many units of product.

I know a guy who isn't hugely rich, but has three Teslas. He and his wife. Two people, three Teslas (R,S,X). That's consolidated buying. Others post that they traded in one or two for one or two more by now. CPOs are dumped on others who tag-along and experience the car for half the initial cost or less.

The scary thing is there are 400k or so "unvetted" reservations for the next vehicle - all those reservations were on the heals of the stock running up and people supporting the stock through it all.

Scary still - how many will consider how "average" the Model 3 just might be. Model S is good. Model 3 is "anti-sold" by Musk in recent blogs. They want you to buy a Model S (at twice the price).

The financial stability of this is just crazy. And yet so many believe that the "celebrity" is right... Doesn't actions of "Tunnels" and "Roofs" throw you off at all? I think, like the internet, cult-in-deep people will need weeks of therapy if things ever do crash and the vaunted "celebrity" falls from grace. And yet to question Musk is simply an outrage to some. People have been "sold to" for centuries. This isn't much different.

[Andreas Hopf]

Pump stock. Retail investors buy product from profits. Pump stock some more. Retail investors buy more product from profits.

A fun game!

[Rogier van Vlissingen]

And on top of it all, Tesla does not in a vacuum, this is playing out against the the backdrop of a slowdown in the car industry... it is not likely to end well.

[Paulo Santos]

It's also playing during a tech bubble (not as large as the one before, though). If the bubble keeps going TSLA will have plenty of support. If the bubble pops even temporarily, TSLA will very quickly have a large problem.

[earlyriser]

You got that right. Many highly valued unicorns not making any money.

[Paulo Santos]

I should add that another associated bubble, cryptocurrencies, is blowing up right now.

[keeppumpin]

Wow...

No wonder the stock price keeps going down... The quality is very poor: http://bit.ly/2qiQ1M1

Go Short TSLA!

[Andreas Hopf]

Amazing.

The low-quality and malfunction are as prevalent as ever. But the wealthy greenwashers happily shell out thousands for repairs and swallow everything that inept service personnel throws at them.

Bizarre.

[Bill Cunningham]

Paulo,

I think it would have been simpler and possibly more accurate to look at the most recent quarter, Q1. They had revenue of $2.7 billion, with 25,000 deliveries. The Solar City as well as the auto leasing business create annuities which gradually grow over time (as Steve _M mentioned). Therefore, if they deliver 25,000 cars in Q3, the $2.8 bn. revenue estimate is probably accurate. However, like you, i don't think 25,000 is likely, so I come up with a similar conclusion using a totally different methodology. Each 1000 car shortfall would result in a revenue shortfall of about $100 million. (Unless of course solar roofs are "off the hook")

[earlyriser]

As I have said before, the model 3 will be the salvation or demise of Tesla. The evidence is not good so far.

[Montana Skeptic]

Solid analysis, Paulo, and as you wrote, you've probably erred on the high side of the likely revenue number.

Given what even Tesla expects to be terrible margins on the Model 3 during the ramp (which, it appears, will continue into 2018), more deliveries than you are forecasting would increase revenues, but increase losses as well.

I enjoy the comments predicting Tesla will game the $7,500 FIT credit by delivering U.S. car no. 200,000 on the first day of a quarter. I would not regard it as wrong of Tesla to try that. It would be in the interests of its shareholders. The fact that the law has this loophole is Congress' problem, not Tesla's.

However, as you noted, a large problem is that Tesla lacks the production capacity to take advantage of that loophole.

Another problem is that concentrating the US deliveries for two quarters would require Tesla to starve its non-US markets of the Model 3, enabling competitors (who are coming in force starting next year) to capture those markets.

But the biggest problems of all are (1) the Model 3 is likely to lose money even benefitting from the FIT tax credit, and (2) Tesla fans are wildly overestimating the market demand for an expensive, unreliable, smallish sedan that just about requires ownership of a home with garage for charging. Just my opinion, of course, and I realize this text is not found in the Congregation's hymnals.

[Simon Mac]

Montana

Personally I think @cparmerlee is on the right track here.

Tesla is a company driven by optics and narrative.

Coming up with a backstory of production issues around Model 3 ramp up will shift focus to revenue, and once again any miss on Q3 S/X delivery numbers will be down to production constraints. However revenue numbers will likely look better (as a lot of revenue is based on Q2 production)

Building up the Q2 figures into inventory was actually a shrewd move, not only did it optically imply a non declining growth, but equally gives a way to smooth revenue (even if at greater loss) as discounted Q2 cars are revenue recognised in Q3 to boost top line figures.

Q4 will all be about Model 3 uber alles.

Quite what chicanery happens in Q1/18 is yet to be seen.

[Montana Skeptic]

Simon Mac: "Coming up with a backstory of production issues around Model 3 ramp up will shift focus to revenue, and once again any miss on Q3 S/X delivery numbers will be down to production constraints. However revenue numbers will likely look better (as a lot of revenue is based on Q2 production)..."

Reflecting on what you've written, and returning to cparmerlee's comment, I acknowledge you and cparm make a compelling case, assuming investors are so easily gulled which, in Tesla's case, is the failsafe assumption.

So, in effect, you believe Tesla continues to inspire confidence among those oh so many who are easily conned with a $1B+ loss this year.

[Davewmart]

Simon Mac said:

'Quite what chicanery happens in Q1/18 is yet to be seen.'

Musk is most certainly a genius in that respect.

The Pied Piper of Insanity has few equals.

In the tale it did not end well, and this won't either.

The only difference is it is the rats who are doing the piping.

[Jimboree]

BELZ. Similar arguments and statistical evidence were echoed by holders of Enron stock.
You are missing the point of this blog. Past performances is irrelevant. In fact, saying the stock has already gone up 1000% is perhaps the worst reason to hold onto it. Here are the real questions you should be asking yourself or seeking answers: is the current valuation justified; is the current valuation likely to remain stable until further positive developments unfold; are there any material events on the horizon that could lead to a precipitous fall in the stock price?
I personally believe the company will have a 1 handle a year from now and I am short out of the money calls and long Out of the money puts. I'm also a momentum player and am long the weekly calls because I believe the stock has room on the upside until they report Q2 earnings.

[keeppumpin]

I'm also a momentum player and am long the weekly calls because I believe the stock has room on the upside until they report Q2 earnings.

Jimboree, I never short calls but I like your play.

I see the only reason the SP seems holding up, is because the market is up so much. Watch for the flat or negative market soon. Be careful with your weekly calls. Cover quick when SP touches 322. Good luck! (bad netflix reports is another signal to cover)

[Jimboree]

Keep, my weekly 315s which I bought at $12 expire on Friday. Right now the stock is being controlled by the weekly option traders and their positions are very bullish going into this week. So, I'm expecting a gap opening on Monday. But I have been wrong about more important things.

[keeppumpin]

Jimboree,

In my opinion, it is like a coin flip right now. I understand why they call. But I see a strong resistance around 328-329. Now the strong support I think is 312-315. And when SP crosses 319, you know 290 will be the next stop. (I even see 270s).

It should be fun. :)

[belz]

Paulo,

Being that you are short please take note of what happen in the last 8 months.

11/30/2016: Short interest 35.7M SP $189.40
6/30/2017: Short interest 27.3M SP $361.61

Short interest down 23.5% as the SP went up 90.9%"

Could you share your experience with SA investors. Investment failure can serve as a valuable lesson to all of us.

Thank you

[katgod]

belz,
It appears 27.3 million people maybe making money or could make money in the near future.