Tesla: 3-Month Model 3 Delay

Summary

• Company now says 5,000 Model 3's per week late in Q1 2018.
• Q3 net loss of $619 million GAAP, or $2.92 per share non-GAAP.
• Cash burn tops $1.4 billion in quarter.

After the bell on Wednesday, we received third quarter earnings results from Tesla (NASDAQ:TSLA) which can be seen in this investor letter. As I detailed in my earnings preview article, the company was likely to report a huge loss and bad Model 3 news, and the stock had been declining in recent weeks as a result. Unfortunately for investors, the company did not provide good news on Wednesday, sending the stock closer to $300 a share.

While Tesla went into lengthy explanations of how the Gigafactory is the main cause of the Model 3 bottlenecks, and that at the Fremont factory certain operations can do high-volume short burst production, the main takeaway is that management now expects to hit 5,000 units a week in production for the Model 3 late in Q1 2018, three months later than originally forecast. The company also has eliminated guidance for hitting 10,000 units per week sometime in 2018, now just talking about implementing that capacity after it hits the 5,000 per week rate.

As for Q3, the numbers were even worse than I could have imagined. Total revenues came in at $2.98 billion, which was between my estimate and the average street forecast. Total automotive revenues were below my forecasts, not showing tremendous sequential growth despite over 4,000 more deliveries, lending credence to the discounting notion that bears have been talking about. Energy storage and service/other revenues came in above my expectations, but overall those are very low margin at this point.

While Tesla guided for gross margins under 20%, I thought that the added Model S/X sales would get it close despite the Model 3 shortfall. Unfortunately, that wasn't the case, with Tesla coming in at 18.3% GAAP and 18.7% non-GAAP. Operating expenses jumped by 8% sequentially, a lot more than I expected, and I already was forecasting a number that was higher than management. The investor letter blames this on record deliveries and $30 million of "one-time expenses," but didn't elaborate on what those were.

When we reached the bottom line for Q3, the company lost over $671 million before subtracting out $52 million of losses attributable to non-controlling interests (from the SolarCity business). In the end, Tesla achieved a new quarterly record loss of $619 million or $3.70 on a GAAP basis. After taking out stock-based compensation and losses on the SolarCity acquisition, non-GAAP per share loss was $2.92, which is 70 cents below my estimate and 60 cents below the street. When we get to the Q4 report likely sometime in February, Tesla may have lost close to or more than $2 billion for 2017.

Tesla finished with about $3.5 billion in cash on hand after blowing through another $1.4 billion during Q3. Although the company pushed back its Model 3 timeline and is expecting another $1 billion in capex during Q4, management is not calling for any more capital raises at this point, although we've heard that story many times before. Perhaps the only good news was that Model 3 deposits rose significantly, driving the customer deposits balance up by almost $83 million. However, management did not provide an update on the number, or detail if the figure has shrunk since the end of the quarter. Remember, the Model 3 delivery shortfall was only detailed after Q3 ended, so any Model 3 reservation changes since are not shown on the balance sheet.

As usual, management also provided a curious statement in regards to Model S/X sales in this investor letter. It said that "based on the recent acceleration in order growth," these two models are on pace for about 100,000 sales this year. Yet, it was a month ago in the Q3 production and delivery announcement that it already said this. So how can there have been a recent order acceleration yet delivery guidance is unchanged? It also now says that the increase in S/X is 30% over 2016, but in the above link it says 31%. Sometimes, I really wonder who is putting all of this together, because it doesn't appear that everyone is on the same page.

As I finish this article before the start of the conference call, Tesla shares are down about 5% in the after-hours session, and were just a couple of bucks above $300 at their low. We obviously knew that the Model 3 was behind schedule thanks to the Q3 shortfall, but supporters of the company were only claiming a few weeks. Well, it appears that Tesla is three months behind schedule, and the Q3 losses were even larger than expected. It's going to be very interesting to see how many of these reservations can be held through 2018, especially as the wind down of the $7,500 federal tax credit approaches. Oh, and if there wasn't enough bad news for Tesla, General Motors (GM) saw its Chevy Bolt outsell the Model S/X combined in the US for October.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. 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.

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