Tesla: Q1 Delivery Miss Secured, Future Quarters May Be Worse
Summary
- Tesla Q1 deliveries came in lower than anyone expected at 50,900 Model 3 and 12,100 Model S and X.
- This dramatic miss happened despite three rounds of price cuts and the introduction of the cheaper SR/SR+ variants.
- Despite Tesla reaffirming full year guidance, I believe future quarters will be worse as more competition arrives, international order books are depleted, and the FIT credit is eliminated.
Tesla (NASDAQ:NASDAQ:TSLA) has finally released its Q1 Deliveries update. While all but the most bullish shareholders expected a sequential decline, very few expected sales to drop as far as they did, especially with three rounds of domestic price cuts, introduction of EU and China Model 3 sales, and the introduction of the long anticipated $35,000 SR and $37,500 SR+ variants. The FactSet Q1 deliveries estimate was walked back several times in Q1, and Tesla still badly missed reduced guidance.
In my last Tesla article, I successfully predicted, in early January, that a Q1 Sales miss seemed likely, due to demand pull forward from the reduction in the FIT credit, questionable EU demand, and increased competition for Model S and X. Despite Tesla reaffirming full year guidance in their report, I am confident that future periods will have lower sales with lower ASP's, especially as Tesla's access to the FIT credit is reduced another $1875 on July 1st and eliminated 6 months after. I believe the same events that had me correctly predict the Q1 shortfall will intensify in coming quarters.
Global Model S/X Demand
Tesla sold 12,100 Model S and X worldwide in Q1, versus my original prediction of 17,332. My prediction did not take into account the elimination of the S75/X75 trims and the series of price changes throughout the quarter that likely confused buyers. Assuming the S75/X75 are not reintroduced, I see sales falling even further below these levels. Many bulls claimed that credible EV competition, especially at the high end, would not impact sales, but Q1 in Norway told a different story
The Audi (OTCPK:VWAPY) E-Tron only launched in February and outsold the Model X. When it is introduced in the US this Summer, I expect to see a similar trend, further impacting S/X sales. The total addressable market for $75,000+ electric cars is small, and Tesla should lose a significant number of sales to Audi and other competitors that will have access to the full $7500 FIT credit.
Here are a list of negative catalysts for Model S and X sales as the year progresses:
- May-June: Audi E-Tron launches in the US
- June: Mercedes EQC launches to EU reservation holders
- July 1st: Further $1875 FIT credit reduction in the US for all Tesla automobiles
- September: Porsche Taycan is officially revealed. Orders open up in October with deliveries by January.
2020 brings increased high end competition from the BMW IX3, Mercedes EQC in the US, and the Volvo XC40. In 2020, Every one of the above mentioned vehicles will have a $7500 FIT credit available while Model S and X will have none. I expect Model S and X sales to continue to decline throughout 2019, and expect the disappointing Q1 sales to be the high water mark for the rest of the year.
Global Model 3 Demand
Tesla delivered 50,900 Model 3 worldwide in Q1. Of this number, approximately 20,000 were delivered in Europe.
China sales are hard to estimate accurately. Many Tesla observers noted that the 8 car carrying ships were sent to Europe and China each, but China had technical issues, since resolved that could have delayed getting Model 3's to customers. This could explain the large number of in transit cars (10,600) Tesla reported this quarter. I'll estimate that Tesla sold half of the EU total, 10,000, in China+RoW (including Canada) for Q1.
This leaves approximately 20,000 Model 3 sales in the US. While the seasonally weak Q1 for auto sales in the US market likely played a small role, this shows a weak underlying trend with only 20,000 sales in the US, despite multiple rounds of price cuts
January 2nd: Reduction of $2,000
February 5th: Reduction of $1,100
March 1st: Addition reductions (in the $3000 range) and lineup shuffling, introduction of a $37,500 SR+ and $35,000 SR.
The 20,000 sales may not have been a disaster, especially after the record Q4, if it were not for the deep price cuts averaging $6000, and the introduction of a $37,500 version to the market, to accomplish it. This does not bode well for future quarters, especially Q3, when Tesla loses another $1,875 of the FIT credit.
Looking ahead, there are additional negative catalysts. I believe High ASP Performance and AWD variant are now or soon to be exhausted in Europe, forcing Tesla to sell lower margin versions in those markets to maintain volume. This Spring, the Nissan Leaf Plus is launched with a 55% larger battery and more powerful motor, on sale for $37,455 with full FIT credit. In 2020, we start seeing a more competition for the Model 3, including the Volkswagon ID NEO, Polestar (Volvo) Polestar 2, Honda Urban EV, Volkswagon ID Crozz, and my favorite, the Electric Mini. These will all have a $7500 FIT credit available while the Model 3 will have $0.
Demand Saturation
The 20,000 US Model 3 sales was a major disappointment for Tesla, but I believe it has further downside, as I believe the main issue facing Tesla is simply demand saturation. As shown below, the US Small/Midsize Luxury Car Market is not huge, and last year Tesla took an overwhelming majority of it in filling several years of pent up demand.
Looking at the above segment sales, I believe 5000 a month in sustainable domestic Model 3 demand would be a big accomplishment for Tesla, but much higher expectations than that are built into both the Tesla's stock price and business model. All pure Battery Electric Vehicles are a challenge to own for a big segment of the population that do not have a garage where a home charger can be installed and are unwilling to spend significant time at a Supercharger. Others are simply not early technology adopters and are more comfortable with a traditional engine.
While the market reaction to Tesla's Q1 deliveries is clearly disappointing, I believe investors should consider this high water market for future quarters, as all of the headwinds that drove this quarters results will only intensify in the future.
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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.