Tesla Pivots To Oblivion

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About: Tesla, Inc. (TSLA), Includes: BMWYY, DDAIF, F, FCAU, GM, TM, VLKAF
by: Andreas Hopf
Summary

The stock is a trade vehicle.

Financial metrics remain perilous.

Operating efficiencies lag necessities.

The company pivots toward Lyft and Uber.

Introduction

When the numbers speak, do not interrupt.

1. Stock

2. Finance

3. Market

4. Sales

5. Pivots

Tesla - marketing image Tesla's modus operandi – fake it till you make it.

1. Stock

After five years of high volatility, Tesla’s (NASDAQ:TSLA) share price returned to $233.98, its 17th March 2014 value. It was a lacklustre investment for long-term holders, apart from early stage investors who already sold at or around local peaks to take profits. Over the same period, the Dow and Nasdaq indices gained nearly 60% and 100%, respectively. Speaking from first-hand experience, rewarded were those who traded in and out of the security frequently, whether on the long or short side.

Tesla - stock chart

(Source: NASDAQ)

Stock ownership

Numerous capital raises and copious stock-based compensation, handed out to employees, directors and Tesla’s CEO Elon Musk, substantially diluted long-term shareholders. The most recent capital raise will dilute shareholders by another 3.5 million shares, as the 8-K filing shows.

Tesla - shareholder dilution

(Source: Tesla Inc. SEC filings)

The most recent Form 13F filings from May show that institutional ownership has not changed that much. For some larger exits like T. Rowe Price or Fidelity Investments, there have been new buyers or existing owners increasing their stake in Q1.

Tesla - institutional ownership

(Source: NASDAQ)

Institutional investors and Tesla’s CEO – who, as per the most recent Form 4 filing from early November, holds 33,824,680 shares – control the stock since IPO. There are currently well over 200 MFs and ETFs worldwide with a meaningful TSLA allocation percentage, many sharing an "eco," “green,” "growth," “tech” or “innovation” focus. Retail or pension investors seeking TSLA exposure may want to study the prospectuses of those below:

Top seven MFs:

13.71% Baron Partners Retail Fund (MUTF:BPTRX)

11.20% Baron Focused Growth Retail Fund (MUTF:BFGFX)

9.15% Fidelity Select Automotive Portfolio Fund (MUTF:FSAVX)

8.56% Nikko AM ARK Disruptive Innovation Fund (LU1861556378:USD)

6.74% GreenEffects NAI-Wertefonds (IE0005895655:EUR)

5.78% Baillie Gifford Positive Change (MUTF: BPESX)

5.53% Baillie Gifford Long Term Global Growth Eq 1 Fund (MUTF:BGLNX)

Top 7 ETFs:

10.63% ARK Industrial Innovation ETF (NYSEARCA:ARKQ)

10.54% ARK Innovation ETF (NYSEARCA:ARKK)

8.92% ARK Web x.0 ETF (NYSEARCA:ARKW)

7.72% VanEck Vectors Global Alternative Energy ETF (NYSEARCA:GEX)

6.23% First Trust NASDAQ Clean Edge Green Energy (NYSEARCA:QCLN)

4.68% Global X Lithium & Battery Tech ETF (NYSEARCA:LIT)

4.08% ALPS Clean Energy ETF (NYSEARCA:ACES)

Exiting a large TSLA position has become increasingly difficult because the selling of high volume blocks could trigger further sell orders, which could prompt a rapid decline of the share price over a very short timeframe – a situation that presents investors with a true Catch 22. Particularly those who bought at or around local highs may have to reassure themselves trusting the company’s recent pivot to a Level 5 autonomous taxi service operation and will probably not want to sell at current levels, but probably not add many shares either, as the company’s future is rather uncertain.

Page 72 footnote (1) of the proxy statement DEF 14A filed this April shows that on 31st December 2018 Tesla’s CEO had pledged 13,394,056 shares to banks as collateral for credit to finance his lifestyle and various undertakings – a collateral valued $4.5 billion at that date and $3.2 billion at the time of writing. With 33,824,680 shares held by the Elon Musk Revocable Trust, pledged shares amount to 39.6% of his holdings – compared to 15.8% at the time of Tesla’s IPO.

Tesla - shareholder structure (Source: NASDAQ)

2. Finance

Although the company went public in June 2010, it's still regarded as a growth story by many institutional investors that are primarily concerned with strong rising unit sales and revenue. At the Q2 2018 earnings call, Tesla’s CEO had guided for continuous profitability from Q3 onwards. At the Q4 2018 earnings call in January 2019, Tesla’s CEO reassured investors that Q1 2019 would still be profitable.

After Model 3 volume production ramped up meaningfully, unit sales and revenue surged strongly in Q3 2018, rising only little in the following quarter. Then, Q1 2019 fell very short of expectations, disproving the CEO’s assertion from only three months before.

The 2018 revenue breakdown shows that, with 92.8% automotive related revenue, Tesla is neither a technology nor an energy company, but an automotive OEM. It should be analysed and valued as such.

Tesla - revenue by segment

(Source: Tesla Inc. SEC filings)

Until Q3 2017, Tesla was able to show positive working capital – current assets exceeding current liabilities, capital to fund day-to-day operations – but that has changed in parallel with the Model 3 ramp-up. Tesla has strung out its suppliers to employ negative working capital as a form of short-term financing. Like companies in the telecommunications or retail sector, Tesla collects cash from its customers quickly, while paying the bills from suppliers slowly. The company effectively borrows from its suppliers. The question is if in a growingly tense macroeconomic climate, and with signs of further ASP and unit sales deterioration, Tesla’s suppliers will continue to stand by.

In 2018, the company’s former CFO explained what the future would bring: “As the Model 3 ramp continues, the negative working capital needs for that, which essentially create extra cash for us, will be repeatable.” He kept his word.

Tesla - working capital (Source: Tesla Inc. SEC filings)

Automotive sales and leasing

The company apparently remains unable to improve its efficiency and cost structure meaningfully and, more importantly, sustainably. The ASP across the model mix is declining, but COGS are not declining faster, as one would expect from an OEM that follows and improves upon contemporary industry best practices.

Tesla - COGS automotive sales and leasing (Source: Tesla Inc. SEC filings)

Over the last six quarters, prior to Q3 2018, Tesla made an average warranty provision per car sold of $2,491. It was reduced to only $1,786 in Q1 2019 despite the many quality issues that particularly afflict Model 3. In Q4 2018, the company sold three times as many cars as it did in Q1 the same year, yet warranty provision per car sold dropped $500.

An automaker’s warranty provision – like warranty costs incurred – is commonly part of COGS and thus it directly affects automotive gross margin. Reducing warranty provisions inflates it and many observers, including me, speculate that Tesla subsumes warranty costs in part under SG&A or the precariously deficitary services and other segment, discussed below, in order to inflate automotive gross margin further.

Tesla - warranty provision (Source: Tesla Inc. SEC filings)

Since Q2 2018, the value of service parts added to finished goods inventory has more than halved, although the number of cars sold doubled after. Customer service deteriorated further from already low levels: “What happened to Tesla service? @Tesla @elonmusk My P90D AC stopped working today, and Tesla no longer has any support people to talk to on weekends. Quality and support made me a loyal customer - not anymore if I can't get support when I need it. Wrong place to cut costs. 6:53 pm - 12 May 2019.” Considering paint deterioration within only one year of use, under reserving for warranty and insufficient service parts production does not bode well for the future.

Tesla - service parts (Source: Tesla Inc. SEC filings)

Although in Q3 and Q4 2018, Tesla’s sales more than doubled, with Model 3 volume production ramping up considerably, SG&A fell. Considering the administration and logistics involved in delivering two or three times as many cars as before, and preparing for Q1 2019 deliveries in Europe and China, this seems rather odd, particularly when considering SG&A as a percentage of revenue. Mapping SG&A per car sold shows the effect of layoffs, mainly on the SolarCity legacy business side, but also efficiency gains. However, though unit sales declined by -30.5%, SG&A per car sold rose again by 52%, from $7,359 to $11,173. It's imaginable that Tesla’s cavalier approach to repairs of brand new cars needs to be factored in.

Tesla - SG&A per car sold (Source: Tesla Inc. SEC filings)

Energy generation and storage

Tesla’s energy generation and storage segment, once heralded a formidable growth opportunity for the company, according to the company’s highly dubious mission statement, continues to underperform. It yielded a gross margin of only 2.4% in Q1 2019, significantly lower than in the preceding quarters that were already lacklustre in their own right. Since Q4 2017, this business segment contracts with revenue dropping by -20.8%.

Tesla - COGS energy generation and storage

It was the takeover of SolarCity by Tesla in November 2016, sold to shareholders by the CEO as a “no brainer” that saw Tesla’s share price more than doubling from $181.47 to its all-time high of $383.45, while the business itself remained an underperformer, as the MW installation chart shows. Driven by greenwashing ambitions of Gov. Andrew Cuomo, the state of New York had invested $750 millions of taxes into a factory that was to produce PV solar cells based on a amalgamation of Panasonic’s (OTCPK:PCRFY) own and Silevo’s allegedly revolutionary “TRIEX” HIT-technology, both later turning out incompatible. Eventually, Tesla put SolarCity’s Silevo effort to bed and Panasonic resorted to selling most of its PV solar cell output to any paying taker. Tesla was to provide 1,460 jobs by April 2020, meaning it would have to double April 2019 employment figures, but Tesla’s PV solar business continues winding down.

This April, Tesla had abandoned its prior PV solar panel sales channels and instead adopted an online-only sales approach, trying to offload roof surveying and electric equipment assessment work to its potential customers in order to cut SG&A. More importantly, in a further attempt to rekindle sales and generate urgently needed cash, the company decided to cut prices for its PV solar panels and associated equipment by up to 16% below the national average. What will happen to Tesla’s PV solar ambitions and its job generation commitment is uncertain. The company’s PV solar shingles, years after launch, remain far from contributing to the bottom line, if they ever will as Ryan Brinkman of JPMorgan noted this April.

Tesla - SolarCity PV solar panel installations

(Source: Tesla Inc. SEC filings)

The segment’s financial metrics reveal that also Tesla’s home and grid battery storage business remains a lacklustre niche effort, even after selling the then world’s largest grid battery storage system to the French company Neoen in 2018 for use with its Australia wind power farm. Australia’s Prime Minister Scott Morrison compared the project to having the world’s biggest banana or prawn, saying it doesn’t solve Australia’s energy problems, and Australian Tomago Aluminium’s CEO Matt Howell noted that the Hornsdale battery storage could only power an aluminum smelter for around eight minutes.

Tesla’s tensions with Panasonic are rising. Panasonic is halting investment in the still not completed Nevada battery cell and pack factory after showing much generosity in the first half of 2018 that allowed Tesla to deliver its unexpected gross margin miracle in Q3 2019. On 1st May 2019 Nikkei Asian Review came out with a diplomatically packaged critique of the Panasonic-Tesla relationship that showed how strained it has become of late. Although the contract with Panasonic necessitates that the company must take a certain quantity of battery cells, and it deploys the surplus for its energy storage products that generate sales, Tesla should probably consider divesting its energy generation and storage business segment, as it contributes nothing to the bottom line while diverting financial and human resources urgently needed elsewhere.

Services and other

Particularly the services and other business segment, consisting of service, maintenance, repair and sales of used/off-lease and trade-in cars, has become a considerable loss generator. Sector gross margin deteriorated to -39.1% in Q1 2019. Analysts like Tony Sacconaghi of Sanford Bernstein suspect that in order to improve automotive gross margin, a metric many institutional investors are focusing on, Tesla may be accounting a portion of its rising warranty expenses, costs that should be booked to automotive COGS, in this segment. On page 38 of its recent 10-Q, Tesla also admitted that the ASP of its trade-in cars keeps falling due to discounts offered for new vehicle purchases.

Tesla - COGS services and other

(Source: Tesla Inc. SEC filings)

Capital raise I

Since 2013, Tesla has burned through $226 million raised at its 2010 IPO and $8.1 billion raised by selling stock and bonds, primarily in the spring season. In nearly nine years, neither shareholder value was created, nor did the company show an annual profit to let investors eventually financially benefit in form of dividends. In order to realise monetary gains, investors instead had to trade the stock on the long or short side.

Tesla’s CEO appears having a predilection for claiming not needing to raise capital. In February 2012, he told analysts that the company would not have to raise capital. In October 2016, he again told analysts that the company would not have to raise capital. In April 2018, he once again told analysts that the company would not have to raise capital. The exact contrary was the case.

The company has seen liquidity crises approaching on several occasions. Ashley Vance’s biography of Tesla’s CEO revealed that Tesla approached Google in early 2013 as the company was close to no longer meeting its financial obligations. In a Recode Decode Q&A from early November 2018, Tesla’s CEO admitted that in the months preceding September that year, the company was facing insolvency. Later re-affirmed in an interview with Axios Media Inc. Many observers that inferred a similarly terminal predicament from the company’s financial disclosures were vindicated. The Seeking Tesla article I published early September 2018 was apparently correct in its assumptions.

Capital raise II

By mid-March 2019, Tesla must have come close to running out of cash again. The company ended Q1 2019 with $2.2 billion in cash of which $768 million were non-escrow customer deposits, already spent. Tesla delivered much of its quarterly sales volume – around 20,000 cars – towards the end of March, spurred on by an internal “all hands on deck” email like the one from Q3 2016. At an ASP of $81,333 across the model mix, this would represent $1.6 billion cash coming in very late in the quarter, indicating a precarious financial situation, a cash crisis. Not surprisingly, several analysts and observers were certain that another capital raise was not only necessary but also imminent.

Tesla - cash minus customer deposits (Source: Tesla Inc. SEC filings)

On 3rd May 2019, the company indeed raised $2.7 billion capital to maintain its solvency and to be able to pay back SolarCity’s $566 million senior convertible notes due 1st November 2019, making it the company’s largest capital raise to date. The rationale for the transaction, presented to investors at a call with its underwriters, is that the company sees its future earnings potential by repositioning itself as a taxi service operator that from 2020 onwards will manage Level 5 autonomous vehicles - lease returns and its customers’ cars that will appreciate in value up to $250,000 in only three years. In pivoting to that narrative, Tesla hopes to capture the excitement of Lyft’s (NASDAQ:LYFT) and Uber’s (NYSE:UBER) IPOs and thus justifying its current and future valuation, projected to be $500 billion by the company’s CEO.

The terms of the capital raise are not as favorable as they appear at first sight. The company sold $847.6 million in stock and $1.84 billion in bonds, the latter carrying a true cost of 6.5% - 8.5%. Tesla had to enter an additional note hedging transaction – long-dated calls – for $475.8 million from underwriters for the convertible senior notes portion of the deal, while receiving $174.4 million for the sale of additional warrants. With Tesla having burnt through $644.7 million cash in Q1 – and Q2 unit sales not looking good at the time of writing mid May – the effective proceeds of $2.38 billion may not last beyond Q4 2019, considering its enormous capital expenditure needs and the $566 million SolarCity bond maturity on 1st November this year. Tesla also still carries a $165 million SolarCity term loan, originally due in January 2019, later pushed back to April and now extended to June, as page 21 of the Q1 2019 10-Q shows in a footnote. Interestingly, the additional $1.84 billion unsecured debt matures before Tesla’s 2025 5.3% junk bond, the yield of the latter having risen considerably to 8.478% at the time of writing.

Tesla - unsecured HYC bond yield chart (Source: Bond Supermart)

Capital expenditures

Tesla’s capital expenditures have declined to levels last seen before Q4 2016. In Q1 2019, the company only spent $279.9 million – the rest of the total expenditure of $305 million going to the purchase of PV solar systems. Page 35 of the Q1 2019 10-Q shows that Tesla guided for capital expenditures of up to $2.5 billion for the year “to continue to develop our main projects including Gigafactory Shanghai, Model Y and Tesla Semi, as well as to further expand our Supercharger and vehicle service and repair networks.” The Model Y is supposedly going on sale in late 2020.

On 29th January, Caixin reported that China Construction Bank Corp., Agricultural Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and Shanghai Pudong Development Bank Co. provide a $521 million loan maturing in March 2020 with an option to borrow another $700 million. Exhibit 10.69 to the Q1 2019 10-Q shows the details of the loan agreement. The total credit not only finances the Pudong facility but also explicitly – see page 10 3.1.2 – allows Tesla to order production equipment, raw materials, etc. to start Model 3 production for volume from Q1 2020 onwards in China. Cloning Model 3 production in China will consume less capital compared to that needed to produce an entirely new vehicle.

With $1.4 billion in cash after customer deposits plus $2.4 billion capital just raised and generous Chinese financing, it seems that the company can probably manage to shoulder its capital expenditures required, even considering that its cash burn could continue in Q2 2019 or beyond.

Tesla - FCF OCF capital expenditures (Source: Tesla Inc. SEC filings)

Regulatory credits I

The amount of regulatory credits Tesla can sell has risen since Q2 2017. In Q3 2018, 60.8% of net profit came from regulatory credit sales and 67.9% in Q4 2018, throwing a very different light on the profitability achieved in these two quarters. In Q1 2019, a perplexing 6.1% of automotive revenue originated from regulatory credit sales.

Tesla - net loss with and without regulatory credits

(Source: Tesla Inc. SEC filings)

For several quarters, Tesla no longer disclosed total regulatory credit revenue in its 8-K shareholder letter, instead reporting it only in some of its 10-Qs. In several years, regulatory credit revenue was only disclosed in full in its 10-K SEC filings and investors are forced to piece total regulatory credit sales together from multiple disclosures. The company generated $1.92 billion regulatory credit revenue, nearly 100% net margin, equalling $5,015 for the 382,509 reportedly sold in the U.S. since IPO.

Tesla - regulatory credit revenue and car sales

(Source: Tesla Inc. SEC filings)

Tesla had and still has to rely on governmental action in the U.S. to be able to generate sufficient regulatory credits and to count on stricter governmental regulations in its other sales regions Europe and China, because it's subsidies, incentives and benefits for buyers of expensive EVs that drive the artificially-created global EV market – and Tesla’s sales in particular. Wherever governments reduce or remove their market interference, the company’s sales decline to near zero instantly after a typical pre-reduction buying-spree, as evidenced in The Netherlands, Denmark, Hong Kong and minor sales regions. After Germany, Canada and other nations have put an eligibility cap on EV sales prices to reign in the misallocation of public funds, China also is intent on reducing its national and regional subsidies from 2020 onward.

Tesla - sales decline after governmental regulation change

(Source: Tesla Motors Club Europe, national vehicle registrations)

It's essential to point out that regulatory credit sales also increase Tesla’s automotive gross margin, calculated differently from that of other automakers. Unlike its peers, Tesla includes neither R&D nor the operation of its own dealerships in automotive cost of revenue. The gross margin metric also is a driver for the CEO’s stock option awards. Analysts have so far refrained from questioning Tesla’s highly problematic gross margin calculation and thus heavily skewed industry peer comparison in conference calls and research notes. For Q1 2019 automotive gross margin would have come in at 15.6% instead of 20.2%, a material difference of about 25%.

It's obvious that, apart from frequently selling stock and bonds, Tesla is heavily reliant on recurrent and growing monetary windfalls from various kinds of governmental actions. One can go as far as to say that Tesla is the one and only GovernmentMotors – the only automaker that's 100% dependent on political decision making.

Regulatory credits II

On 25th February, the EU commission published a declaration of intent between Fiat Chrysler (NYSE:FCAU) and Tesla to pool their cars sold in Europe to meet the 2020 EU emission targets by averaging fleet emissions, yet another politically facilitated source of 100% net-margin income for Tesla. The declaration of intent is initially valid for 2019. Several other OEMs intend to form two additional pools among themselves.

On 7th April 2019, the Financial Times reported the existence of the FCA Tesla pool, noting rather non-specifically: “Fiat Chrysler Automobiles has agreed to pay Tesla hundreds of millions of euros.”

On 3rd April 2019, the Financial Times reported that FCA would pay Tesla €1.8 billion ($2 billion). This is not quite the case, as evidence from both company’s quarterly filings, annual reports and management statements show.

First, the disclosures by Tesla:

10-K 2018 page 83: “We had no deferred revenue related to sales of automotive regulatory credits as of December 31, 2018 and 2017.” This shows, as in all prior quarters or years, that there was no deferred regulatory credit revenue from FCA or another OEM.

10-Q Q1 2019 page 10: “Deferred revenue related to sales of automotive regulatory credits was $140.0 million (…). We expect to recognize the deferred revenue as of March 31, 2019 over the next two to three years.” It's possible that this rather limited cash inflow, drawn out over a long period, could be attributed to the FCA pooling deal in the EU; but it could be attributed also to FCA or other OEMs buying regulatory credits from the company in the U.S.

Earnings call transcript 24th April: Asked about the FCA deal by analyst Philippe Houchois from Jefferies, Tesla’s CEO replied, “I think it’s a confidential deal with FCA so we and we agreed with FCA not to comment on it publicly so we must abide by that.”

Second, the disclosures by FCA:

20-F (“10-K”) 2018 page 259: “(6) Purchase obligations are comprised of (…) and (III) commitments to purchase intangible assets relating to regulatory emissions credits for an aggregate amount of approximately €75 million.” It's possible that this 2019 purchase obligation already relates to the Tesla pooling deal in the EU, but it could also be attributed to buying regulatory credits from Tesla or other OEMs in the U.S. It's enlightening to see that FCA lists existing and pending regulatory mandates pertaining to emissions it all sales regions, and how they could affect the passenger and commercial vehicle market going forward, while Tesla neither educates its shareholders on the matter nor discusses its fundamental dependency on it.

6-K (“10-Q”) Q1 2019 page 9: “Included within cost of revenues for the three months ended March 31, 2019, and 2018 were amounts of €170 million and €82 million, respectively, which represents the accrual of regulatory expenses and the utilization of regulatory credits, primarily in North America and, for the 2019 period, also in EMEA.” Then, on page 54, the company states “During the three months ended March 31, 2019, FCA entered into multi-year non-cancellable agreements for purchases of regulatory emissions credits in various jurisdictions with total commitments of €1.8 billion. The purchased credits are expected to be used for compliance years through 2023.”

Earnings call transcript 3rd May: Richard Palmer, CFO “We did enter into various agreements in the quarter to ensure that we have access to regulatory credits to complement our vehicle launch strategy towards meeting emissions compliance in EMEA and NAFTA going forward. So the total commitment under those - under those contracts is about €1.8 billion, which will be spent over the next three years (…) the compliance costs for EMEA for this year we target - we're expecting at around €120 million, going into next year we would expect that to increase.”

3. Market

Global sales shift

The global market for passenger vehicles is undergoing a fundamental shift. Auto market analysts JATO saw sales in Europe and China declining in 2018, while North American sales stalled. Despite high consumer confidence, a moderate sales decline is forecast for 2019, and going forward, as the aging populations in the aforementioned three global sales regions predominantly seek replacement purchases. The Chinese auto market, far from the latter situation, is nevertheless in its eleventh month of significant decline.

All the while, fundamental sales growth persists in South America, Asia Pacific and India, despite short-term fluctuations, with Africa slowly appearing on the horizon as a meaningful sales region. Consumers in those regions are emerging from poverty to modest wealth by the tens of millions each year. The global relevance of Europe and North America as core drivers of global consumption continues to decline, with most consumers seeing little wage growth and ever more precarious employment.

In parallel to the latter paradigm shift, consumer demand differentiates itself further. Europe, China and North America see strong demand for CUVs, SUVs and pick-up trucks, whereas South America, Asia Pacific and India see continuously high demand for smaller robust passenger vehicles, apart from wealthy urban consumer cohorts that display a growing propensity for the aforementioned vehicle types preferred on the northern hemisphere. Tesla so far neither caters to demand in global growth areas nor does it offer estates, convertibles, fastbacks or coupés.

Global EV market

The global market for EVs, meaning HEVs, PHEVs, BEVs and FCEVs, continues to grow at a slower pace than many optimistic analysts anticipated in recent years. The revolutionary disruption of personal transportation, assumed with certainty by many exuberant analysts, failed to occur once again, and EVs saw only 2.9% of global passenger vehicle sales in 2018. Investors concerned with the qualitative and quantitative developments of global EV markets should inform themselves at EV volumes and ICCT instead of via company affiliated blogs and fan sites.

EV sales growth only occurs in sales regions where strict governmental regulation either financially entices or legally forces EV adoption for two main reasons – citizens’ environmental concerns in California, Florida, Norway or The Netherlands on the one hand – or particulate emission reduction and future global automotive sector domination plans in China on the other. In any case, the global EV market remains artificial, with governments in control instead of market forces.

A side effect of un-coordinated governmental intervention is that it often promotes, possibly inadvertently, expensive, oversized, overweight and thus highly unsustainable BEVs, making them particularly attractive for wealthy households that often purchase EVs as a secondary or even tertiary vehicle – as a material feel-good icon that shall demonstrate their concern for the environment. However, wanting to better the world by way of oversized overweight BEVs amounts to nothing but arriving at the beach to drain the ocean with a teaspoon.

The main barriers to EV adoption, particularly in sales regions with low or no subsidies, incentives and benefits, are high price and insurance premiums, followed by range, particularly during the winter season, and the lack of ubiquitous and convenient city and roadside charging infrastructure. The existing strata of high net worth individuals in the aforementioned global growth regions are too small to effect a swift substantial fleet rotation away from ICEVs. For most consumers in those regions, used cars and low-priced ICEVs will remain the dominant vehicle type of choice, the car being the costliest discretionary purchase for most households.

The global fleet rotation, with over 1.3 billion ICEVs currently in use, will take decades. The imaginary tipping point remains chimerical.

Tesla - EV and ICEV sales global Tesla - EV and Tesla sales global

(Source: OICA, EV-Volumes, BNEF)

4. Sales

After eventually rising strongly with higher volume production of Model 3, fulfilling years of pent-up demand with the FIT credit halving deadline in view, Tesla’s global sales nearly plateaued with a sales increase of only 8.3% from Q3 to Q4 2018, to then fall considerably by -30.5% in Q1 2019, severely damaging the company’s growth narrative.

At the end of Q1 2019, the delta between Tesla’s production and sales grew to 34,106 units. With 10,600 cars in transit at the end of the quarter, that leaves 23,506 “missing” cars unaccounted for since 2013. At an ASP of $81,333 across the model mix, this represents $1.9 billion in unrealized revenue. To this day, the company has not clarified the whereabouts of these missing vehicles, meaning how many the company retained as loaners or service vehicles and how many were scrapped.

Tesla - production versus sales

(Source: Tesla Inc. SEC filings)

On 30th January 2019, Tesla’s CEO stated in the Q4 2018 shareholder letter that the company expects to deliver 360,000 to 400,000 cars in 2019. A few hours later, Tesla’s CEO said on the Q4 2018 earnings call that the company will deliver 350,000 to 500,000 Model 3s in 2019. On 19th February, Tesla’s CEO tweeted Tesla will make around 500,000 cars in 2019 to then tweet Tesla will rather achieve a 500,000 car production run-rate at the end of 2019. On 28th February, Tesla’s CEO said on a call with journalists that the company will produce 420,000 to 600,000 cars in 2019. On 3rd April 2019, Tesla’s CEO stated in the Q1 2019 shareholder letter that the company expects to deliver 360,000 to 400,000 cars in 2019, as initially stated in January. Erratic management guidance for core product production and sales does certainly not help to restore investor confidence.

The question is how the current and future model mix with substantially lower Model S and X sales – albeit both models soon refreshed with a more efficient drive train and faster charging – as well as rather stagnant and lower-end Model 3 sales will compress automotive sales revenue and gross margin. I expect unit sales to remain lacklustre in Q2 and cash flow problems resurfacing in the fourth quarter this year.

Europe Model S and X

Disproving claims to seasonality, Model S Q1 2019 sales declined substantially by -58.3% YoY (-59% to Q1 2017) while Model X Q1 2019 sales declined equally significantly by -33.3% YoY (-45.2% to Q1 2017). Sales are beginning to be impacted by the arrival of Model 3 and the disadvantageous EV taxation change in The Netherlands, one of Tesla’s formerly three core sales regions in Europe, with Norway and the UK now remaining the only two. The price discounting the company reported on page 38 and 40 of its Q1 2019 10-Q and the advantageous company EV taxation change in Germany failed to rekindle European sales. Already now, and more so in the future, competitors’ offerings cannibalize the sales of Tesla’s aging high-ASP models, and April with half of May showed no improvement.

Norway’s Dagens Næringsliv reported that within one year, Tesla fell from fourth to 51st place in customer satisfaction, due to consistently low quality and lack of adequate customer service. Rental buyers, a customer bracket into which Tesla could offload much inventory in times of need, are experiencing massive problems, not only in China, but also in Europe. EC-Rent from the Netherlands had to abandon their Tesla rental fleet “due to increasing technical defects and the lack of a fast delivery of parts from Tesla, we had to halt half of our Teslas in our rental fleet from mid-December. Since this is no longer tenable and a solution does not seem to be within reach, our activities are currently discontinued.” Umeå Eltaxi in northern Sweden went bankrupt over the lack and cost of Tesla service.

Tesla - monthly sales Model S Europe

(Source: Tesla Motors Club Europe, national vehicle registrations)

Tesla - monthly sales Model X Europe

(Source: Tesla Motors Club Europe, national vehicle registrations)

Europe Model 3

Three years of pent-up demand saw Model 3 sales rising into the end of Q1 2019, after sales began to ramp up when the RWD long-range version first became available in January. Since early April, customers also can order the lower-priced standard range plus variant with 386km range, starting from €45,480 alongside the AWD long-range version starting from €55,780 with 496km range – in other words paying €10,300 for a 110km “larger fuel tank.” From inventory level in Norway and elsewhere, it's safe to say that April sales volume resulted from an overflow of cars that were shipped but not delivered yet. Also for the lack of a RHD model, the UK being Tesla’s second-largest European sales region, April sales fell short of February sales by a low number.

Shipping activity to Europe has been low in April and May so far and it's still uncertain if Tesla can ship as many units to arrive in time for delivery in Q2 as it shipped in Q1. With the AWD long-range sales cycle on the wane, the standard range plus could carry the torch into Q3, but ASP and margins will be affected.

Model 3 operating cost savings, one of Tesla’s most prominent sales arguments besides straight-line acceleration, do not materialise for many Europeans: The Model 3 SR+ with 415km range starts at €45,480, which is over €13,000 more compared to the Škoda Octavia Premium 2.0 TDI that features more options, better interior and a higher fit and finish quality. The Model 3 uses 20kWh per 100km driven in mild weather on city and country roads, which means that at €0,29 cost of domestic electricity per kWh in Germany – Tesla’s own charger cost per kWh being higher – the cost per 100km is €5.8, whereas the Škoda uses 5.3l diesel per 100km under the same conditions. At a cost of €1.24 per litre diesel, the cost per 100km is €6.6. At an average of 15,000km driven per year, the operating cost difference is a mere €120 per year and is further diminished in the cold and winter weather season via battery pre-heating and battery discharge, as well as via higher insurance and repair costs.

After 108 years of use, the Tesla would come out on par with the Škoda, as far as fuel costs are concerned.

Tesla - monthly sales Model 3 Europe

(Source: Tesla Motors Club Europe, national vehicle registrations)

U.S. Model S and X

Invalidating common but false claims to seasonality also in the U.S., Model S Q1 2019 sales declined by -31.6% YoY (-40.6% to Q1 2017) while Model X Q1 2019 sales declined by -12.5% YoY (-10.5% to Q1 2017). Sales were impacted by the arrival of Model 3 and the 50% FIT-credit reduction from January 2019, further reduced to $1,850 from July 2019 onwards. The substantial discounting of up to $18,000 for both models the company alluded to on page 38 and 40 of its Q1 2019 10-Q and a compensatory price reduction of $2,000 Tesla offered across the range from January 2019 onwards apparently did not rekindle U.S. sales, too. The arrival of Model 3 and some competitors’ offerings likely began to cannibalise sales of Tesla’s ageing high-ASP models and April showed no improvement.

Consumer Reports files Model X under the 10 least reliable cars due to problematic body hardware, paint and trim, in-car electronics, noises and leaks. Several accidents under scrutiny of the NTSB, which some observers speculate to be attributable to Tesla’s “Autopilot” Level 2 driver assistance feature and spontaneous battery fires of stationary cars, do not instill much confidence in the company’s ability to improve safety and quality of its cars.

Tesla - monthly sales Model S North America

(Source: InsideEVs, EV Sales)

Tesla - monthly sales Model X North America

(Source: InsideEVs, EV Sales)

U.S. Model 3

Two years of pent-up demand saw Model 3 sales rising slowly after the car became first available as RWD long-range version in July 2017. Already in October 2018, that version was discontinued to resurface as a mid-range version, likewise discontinued in March 2019, with the long-range version becoming available again, but only by telephone call or in-store appointment. From July 2018 onwards, the AWD and AWD performance long-range versions went on sale, starting from $49,500 and 59,500 respectively, and sales rose strongly into the end of the year. Early February 2019, a $35,000 RWD standard range went on sale, in order for the company to be able to claim that it eventually achieved offering a mass-market Model 3. However, that version was on sale only six weeks and is since then sold only by telephone call or in-store appointment. This low-end version soon metamorphosed into an RWD standard range plus. On 11th March, Tesla’s CEO took to tweeting, as is often the case, to boost sales by announcing an imminent 3% price increase, however, high discounting went on, as TMC forums show. Since 12th April 2019, Tesla is also offering a lease option for the Model 3 with a $3,000 down payment and no right to purchase the car at the end of the lease, because the cars are reserved for the company’s Level 5 autonomous taxi service operation.

Model 3 sales spiked in the previous quarter due to the FIT-credit reduction. Then, sales fell precipitously in Q1 2019 despite discounting and discontinuation of the 75 kWh Model S and X. Sales did not pick up in April and could remain somewhat low in May also, until the next FIT-credit reduction from July 2019 onwards and a reduced $399 per month lease offering could improve June sales and carry volume into Q3. At the time of writing, Tesla has lifted the price again by $1,400 for the RWD long range and $400 for all other models, as well as raising the price of FSD to $6,000. Tesla’s erratic and haphazard model and pricing policy reveal there is no proper strategy in place.

Canada Model 3

Meanwhile, as of May, Tesla begun to exploit Canadian subsidy regulations by offering a 93 mile limited bare-bones Model 3 RWD standard range that slips under the $45,000 (Canadian) threshold by a single dollar. In doing so, the $53,700 RWD standard range plus is now eligible for the $5,000 subsidy, because it's considered a “trim level” of the base model. Like in the U.S., the 93-mile version can only be ordered by phone or via in-store appointment, the regular model however is available on-line. This interpretation of regulatory loopholes is in line with Tesla exploiting the California ZEV credit regulations by way of theoretical battery swap station functionality of Model S and exploiting the German subsidy regulations by offering a bare-bones Model S below the subsidy threshold that was then lifted to higher ASPs by customers having to order what used to be standard trim as extras.

Tesla - monthly sales Model 3 North America

(Source: InsideEVs, EV Sales)

Consumer Reports removed Model 3 from its recommended cars list in February 2019 due to its problematic body hardware and trim. Paint is chipping off new northern European Model 3s, the cars likely having been tested only on California highways in fair weather.

China Model S, X and 3

Trade and tariff tensions between the U.S. and China negatively affected Model S and X sales from July 2018. China introduced a 40% tariff on imported U.S. cars, reduced later to 15%, until the issues were to be resolved in April or May 2019. At the time of writing, trade and tariff talks came to an adversarial stalemate with enormous tariffs levied on a broad range of Chinese goods. The dispute could evolve into a cold war of containers and seriously damage Tesla’s prospects in China regarding product sales and Pudong Model 3 factory effort.

To counteract Chinese retaliatory measures, Tesla raised Model S and X prices by around 20% only to cut them again by 12-26% in late November 2018. The company also announced Model 3 going on sale from $77,928 upwards only to cut prices again in late December 2018 to $72,000. From February 2019 onwards, Tesla also offered free enhanced autopilot for all Model 3 orders to grow sales. While Model S and X sales did not recover yet, the company did manage to ship Model 3 in the latter half of Q1 2019 after import declaration problems were resolved with Chinese customs. Shipping activity to China has so far been low in April and May, and it's uncertain if Tesla can ship substantially more units to arrive in time for delivery in Q2.

Tesla - revenue China

(Source: Tesla Inc. SEC filings)

In part due to the company’s amateur approach to automation and production, the quality of cars shipped to China remains as problematic as elsewhere. Chinese customers are showing their growing discontent with Tesla’s susceptibility to defects and sub-par service offering. This year, already three Model S spontaneously caught fire, two at a Shanghai charger and Shanghai underground car park and one at a Hong Kong shopping mall car park. A Chengdu rental and taxi company operating 278 Model S and X became so displeased it took out large billboard adverts in New York’s Times Square to demand proper service and compensation for losses occurred, many cars not properly repaired for over a year.

Despite decades of American IC design, layout and fabrication prowess, with short-term involvement of Jim Keller of Apple and AMD IC design fame, Tesla insisted that it had to turn to Chinese experts in order to obtain the “brain” that's instrumental in its Level 5 autonomous driving effort, replacing Nvidia (NASDAQ:NVDA) as a supplier. The company stated: “For a product as safety critical to consumers, and critical to the essence of Tesla, we turned to industry experts who could achieve this quality and complexity in addition to the deadlines, which was not possible outside of China.” On 3rd May, U.S. trade officials rejected Tesla’s bid for relief from President Trump’s 25% tariffs on Chinese exports to the U.S., on its Chinese-made “brain” for Model 3.

Tesla’s plan for success in China now depends on the start of quality volume production at the Pudong factory. It even more so depends on how and when the U.S.-China tariff and trade dispute can be amicably resolved.

Global near-term outlook

For Tesla to meet 2019 lower-end guidance of 360,000 sales, the company must sell 99,000 cars in each of the remaining three quarters. With April and half of May over, based on cars in transit and shipping activity, I estimate Q2 sales (and sales drivers) as follows: 22,000 Model 3 Europe (standard range plus, more shipping volume); 30,000 Model 3 North America (standard range plus, leasing); 12,000 Model 3 China (more shipping volume) and 16,000 Model S and X global (higher range, discounts) for 80,000 total sales at shrinking ASPs and margins.

5. Pivots

Compared to the customary ado and splendour surrounding Tesla product launches, factory grand openings and announcements of imminent announcements, the “Model Y unveiling” and “Autonomy Day” came and went almost clandestinely, much to the chagrin of analysts and investors who expected a CEO on stage in top form, with spectacular new offerings in tow.

Model Y

When Tesla rolled out the Model Y prototype on 14th March, it treated investors to what must have been one of the most harrowing product launches in recent automobile history. Model Y arrived as Model 3 in disguise, an exercise in generic brand extension, scaled up the Z-axis, sharing 75% of the latter’s parts bin. Presented as mid-size SUV seating seven passengers to the disbelief on onlookers, the car is a CUV at best, supposedly going on sale in late 2020 with a starting price of $39,000 in its most lacklustre RWD standard range incarnation. Analysts were not amused and the company remained silent on how many $1,000 reservation deposits it has collected to date.

This one goes to 11

With impeccable timing, two days before the disastrous Q1 2019 results were disclosed, with the urgently needed capital raise in the works at Tesla’s go-to underwriters, Tesla held an “Autonomy Day” on 22nd April, followed by a “broad investor call” on 2nd May. Both events were staged to bedazzle analysts, investors and the public with an outlandish proposition of such magnitude that would see alchemy emerging as prudent scientific endeavour:

The company proposed no less than pivoting to become a Level 5 autonomous taxi company.

With that, Tesla intends to steam well beyond its current valuation in the slipstream of Lyft’s and Uber’s IPOs, segueing into operating a ride sharing service that Morgan Stanley’s Adam Jonas intimated to Tesla’s CEO at a 2015 conference call. Once pivoted, the company would catapult itself towards a $500 billion market capitalization from 2020 onwards, while existing customers’ cars would appreciate towards $250,000 apiece as they age. Tesla would operate Model 3 lease returns, lessees no longer allowed to purchase the car upon contract expiry, competing with Tesla owners who would put their cars at the disposal of Tesla’s “ride sharing network.” If any of this sounds bizarre, that's because it is.

Autonomous driving pioneers like Mobileye’s Amnon Shashua and Waymo’s John Krafcik have more than once cautioned that Level 5 autonomous driving may be decades away, if it ever arrives. Level 5 autonomy meaning no less than a robotic car that would need neither user input nor user controls; able to drive itself at any time, on any terrain, in any place, in any weather, in any traffic condition.

Too much pseudoscientific nonsense already has been written on this topic, the current “next big thing,” and so I end this article by leaving the reader to admire four exquisite but all too common traffic scenarios that will see Tesla’s “brain” return from the effort wearing a dunce cap.

Tesla - FSD notwork Sweden winter normalcy, Dresden signage puzzle, Hong Kong construction maze, Adelaide killer roundabout

Conclusion

This year, the final word, by courtesy of the Book of Daniel:

MENE, MENE, TEKEL, UPHARSIN

Disclosure: I am/we are long TSLA, VLKAF, MMTOF. 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.

Additional disclosure: This is no recommendation to buy or sell securities as that carries with it very high risks. The information contained in this article is for informational purposes only and subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decision.