Tesla: Competition Does Matter

About: Tesla, Inc. (TSLA), Includes: POAHY
by: Bill Maurer

ARK Investment shrugs off Porsche Taycan as threat to Model S.

Tesla Norway S/X registrations have cratered due to competition.

EV market will only get tougher in 2020.

When you are a leader, sometimes you don't have a clear view of the space around you. That means you can occasionally ignore mounting competition, even if there is no one name that can kill you. For electric vehicle maker Tesla (TSLA), the supporters' case that competition won't harm the company may help further the decline in the EV leader.

Last week, luxury vehicle maker Porsche (OTCPK:POAHY) officially unveiled the Taycan EV, seen in the image below. Starting production this week, consumers will get their hands on the vehicle next year, and it will become the shiny new toy in town. While pricing of initial versions was higher than expected, cheaper variants will come later on, and the first year plan is for 40,000 vehicles based on tremendous reservation interest.

(Source: electrek article, seen here)

On Monday, ARK Investments, which has been one of Tesla's biggest backers with its investments in the stock and $6,000 potential price target, claimed that the Taycan is not a threat to the Model S. The analyst in fact stated that competition could be a good thing as it accelerates EV adoption, and showed how the Taycan's specs don't quite live up to the Model S for the price.

The issue I have with ARK's statement, beyond their potential bias given their position in the stock, is that competition is always dismissed when it comes to Tesla. That's a dangerous thing to do, especially when a vehicle like the Model S launched back in 2012 and the Model X was in 2015. Do the hottest Christmas toys from back then still generate tremendous interest today?

Let's take a look at the situation in Norway, for example, which has been Tesla's most important European sales market. That market has seen two new luxury EVs reach volume sales this year, the Audi e-Tron and the Jaguar i-Pace. As the chart below shows, those models have helped to drive registrations of the Model S/X down more than 43% through August. Through the first nine days of September, the numbers are getting even worse.

(Source: Norway EV stats, seen here, and TMC registration stats, seen here)

Now I'm sure some Tesla supporters will claim the introduction of the Model 3 has had some impact on Model S sales, even though the price points are tremendously different. Even if that is so, what is the excuse for the 38% drop in Model X registrations? By the way, the Mercedes EQC is starting to see its first few dozen units crop up in Norway, as that new EV provides another competitor to the fray for the final quarter of 2019. The Model 3 will itself see competition soar in the next year or so from the VW ID.3, the Polestar 2, and a host of others, in what is seen as the biggest year for EV development yet. Tesla buyers also lose access in the US to the final $1,875 of the EV tax credit, while most other manufacturers will have access to up to $7,500 for a while.

Losing a few thousand S/X units may not seem like much, but it does really add up. Through August, Tesla was down 2,449 registrations in Norway alone of those two luxury vehicles. Let's assume that they had an average selling price of $90,000 and a gross margin of 27%, which seem reasonable given what Tesla reported through three quarters last year. Those lost sales would mean a decline in gross profit of roughly $59.5 million.

From what the company has told us, the Model 3 currently averages about $50,000 per unit sold and has a gross margin of roughly 20%. That means to make up the lost gross profit dollars from those S/X units, Tesla needs to sell just under 6,000 Model 3 units, and this is just in Norway, not including what's happening around the globe. Selling thousands more vehicles thus requires additional spending for service, superchargers, sales, interest on the debt portion of the recent capital raise, etc. Thus, Tesla lost over $1.1 billion in the first half of the year after taking out non-controlling interests.

The situation for Tesla gets even harder as it has cut prices around the globe and increases the sales mix towards cheaper and lower margin vehicles. Norway has had almost 600 Model 3 SR+ units registered in Q3 so far, representing 42.3% of the total, against zero of that variant in Q2. As the SR+ sees its volumes soar in Europe this quarter, it's hard to trust Tesla management that thinks it can be GAAP profitable this quarter after huge losses so far this year.

In the end, investors in Tesla really shouldn't ignore competition. We've seen how new EVs have hurt the Model S/X in Norway, for instance, and new threats are cropping up by the quarter. Even if the Porsche Taycan only sells 20,000 units in the first year and just 10% of that is lost Model S sales, that's another 2,000 high margin units lost that Tesla has to make up for somewhere. Replacing some of these sales by expanding into more small markets around the globe add more costs that further pressure the bottom line. Gaining those next 1,000 sales become more and more expensive. While the Porsche Taycan can't kill Tesla by itself, dozens of new EVs from major manufacturers coming in the next few years could. It's the death of a thousand paper cuts.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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