- Tesla shares, as of writing, are off ~31% from their highs. While I believe the stock is around fair value long-term, I am not quite ready to begin another position.
- Investors could get even more attractive, long-term entry points in the stock. Q1 and potentially Q2 results could be abysmal relative to consensus expectations.
- I do not anticipate that TSLA will "comfortably exceed" 500K units in 2020. It will take a second-half miracle to see the company get to these numbers.
- While I am a long-term bull, I am not long the stock. Wait for an even greater, inevitable pullback. Coronavirus-related weakness is not priced into estimates. Model Y may not have the initial demand investors are anticipating.
- Rating reiterated at HOLD; PT remains $680. Waiting for a fundamental bottom before upgrading.
Tesla's (NASDAQ:TSLA) shares are ~31% off their highs as of writing. While I am long-term believer in both the business and the stock, analyst expectations for the quarter seem to be way too high. I believe Tesla will see deliveries drastically underwhelm consensus expectations. This could cause an even greater reduction in the stock price, and a fundamental bottom.
Expectations Vs. Reality
Investors have been trading the stock upwards for the last few months, with the stock going downright vertical since the new year. To be clear, I am not a bear on the stock long-term, but expectations for the year and Q1 in particular need to be reset. Last I checked, Q1 consensus was for Tesla to deliver ~99K cars in Q1. Looking back at Q1 of last year, Tesla saw a sequential decline of 63.6% in U.S. Model 3 deliveries. Keep in mind the Q4'18-Q1'19 dynamic Tesla saw: a pull-forward of demand (tax credit reduction), seasonality that it had never previously experienced, resource diversion towards getting cars overseas, and backlog depletion. So basically, this was the perfect storm heading into Q1. This year however Tesla has figured out overseas logistics, is operating on organic demand (rather than pent-up backlog), and didn't see a large pull-forward. The only constant here is the seasonality of the auto business. For this reason, the sequential bumpiness should ease significantly.
It is estimated that Tesla delivered ~47.2K Model 3s in the U.S. last quarter. Assuming a 25% sequential drop-off in deliveries, we get to around 35,456 Model 3s. Assuming that Tesla sold 47.2K Model 3s in the U.S. last quarter, the rest of the units likely were Europe sourced. So that means in Q4, Tesla saw around 45,345 units. A lot of the dynamics at play last year in Q4'18-Q1'19 in the US are now at play in Europe. Specifically, backlog has been filled, demand pulled forward (tax credit phase out in the Netherlands), resources being devoted to GF Shanghai, and seasonality in general. Throw in the monkey's wrench of coronavirus spreading to Europe and demand could be even lower. So, I anticipate numbers deteriorate in Europe worse than they did in the U.S. last year. Because assembly doesn't take place locally (at least not yet), Tesla has to also deal with exporting cars to Europe. Assuming a 75% Q/Q decline, Europe sees Model 3 deliveries of 11,336 vehicles. So, non-MIC Model 3 should see units of 46,792.
Now, one of the two x-factors for the quarter: Chinese registrations. In January, Tesla saw Model 3 sales of 3,183 vehicles. In February, the company began to face the brunt of the coronavirus impact. For quite a bit of February, GF Shanghai was idle, and I believe that Tesla only returned to production in a limited fashion. I believe that because of how complex the auto manufacturing supply chain is, Tesla wasn't able to operate at full capacity as suppliers weren't able to operate at full capacity. I believe Tesla likely operated at a little south of half of normal capacity. Since the company demonstrated capacity could reach 3K/week, and that it saw a roughly 1.5 week delay in production, it probably produced around 3,500 cars. I am of the belief that while new coronavirus cases in China are decelerating, international spread will keep global supply chains in a state of shock. In addition, the manufacturing side of the economy in China seems weak, with PMI coming in well short of expectations. So while GF Shanghai is likely operational in March, it still might not be at full capacity. So without going too in-depth, I would anticipate ~2K/week on a full four weeks, which gets me to 8K produced in March. Assuming that deliveries trail production by 500 units, I get to 14,183 MIC deliveries for Q1.
This brings my overall Model 3 delivery estimate to 60,975 vehicles.
The other x-factor in this report is Model Y delivery numbers.
It appears as if Tesla plans on delivering the first Model Ys in the U.S. in March, beginning mid month. So, we're really looking at a two-week month for Model Y deliveries. I'm going to conservatively assume Tesla delivers 2,000 Model Ys this quarter, 1K/week. These vehicles are Tesla's performance edition Model Ys, not standard or long-range models.
Finally, we've got to look at Model S/X delivery numbers. From Q4'18 to Q1'19, Tesla saw U.S. demand drop-off by 48.5%. China and Europe saw a 66.6% decline. In Q4'18 we saw Tesla pull forward S/X demand ahead of the ZEV tax credit phase-out and just the general diminishing of demand. That being said, I do not anticipate the sequential step-down is as aggressive as it was last time around in the U.S. I'm anticipating a 40% drop sequentially to 5,550 units. In Europe and China the trend could worsen as the MIC Model 3 will likely cannibalize Model S sales, and we see the tax credit phase-out negatively affect the overall EV market in Europe. So, I'm modeling 70% sequential decay to a unit count of 3,067 in Europe & China. This gets me to a total Model S/X combined unit sale number of 8,617 units.
Putting it all together, I get to an overall delivery estimate of 71,592. vehicles, an ~28% miss relative to consensus.
Quantifying The Impact On Financials
Assuming coronavirus has an impact on Tesla's deliveries, we can already probably assume it will have a similarly negative impact on the financials of the business. First of all, we need to make some assumptions about gross margins and overall ASPs. Here are those assumptions:
|MIC Model 3||$45,000||14,183||$638.2M||1%|
As Tesla ramps MIC Model 3 as well as the Model Y, economies of scale will take over, labor costs per unit will drastically decrease, and gross margins will scale. Until then, MIC Model 3 and Model Y deliveries will likely weigh on the overall gross margins. Looking towards service and energy revenue, I wouldn't anticipate anything too crazy from these segments. Tesla's Solar Roof product has begun to see deliveries materialize in Q1. So, looking at Tesla's Energy segment, last year Q1 had a sequential decline of 12.4%. I would anticipate that this number will improve. While Q1 is seasonally weak, Solar Roof installations could help offset this negativity. I am anticipating a sequential decline of 9%, bringing revenues to $396.7 million. Initial roll-out of solar roof could weigh on margins, so my gross margin expectation is for ~10%. Looking at service, I am anticipating a 7.5% sequential decline, the same trend we saw last year. This brings me to revenues of $536.5 million. Margins should remain negative. My expectation is -15%. ZEV credits were $133 million in revenue in Q4. I expect this number to be about flat at $135 million. From what I understand, ZEV revenue is raw margin, flowing straight to the bottom line.
Here is a little table demonstrating my divergence from consensus this quarter.
|My Estimate||Consensus||Difference (%)|
As you can see, I am pretty far away from the Street on all three numbers, with the Street anticipating a profit while I expect a loss.
Where Could I Be Wrong? Long-Term View?
In conclusion, analysts have underestimated short-term headwinds to Tesla's numbers. As a result, expectations need to be reset, and an extremely disappointing print could do the trick. That being said, I could be drastically underestimating Model S/X volumes, and margins on initial Model Y and MIC Model 3 volumes could be higher than my estimates. Solar roof volumes could drive a sequential flatness in the energy division, and maybe Tesla is making even more drastic in-roads on service profitability. Even then however at best Tesla comes in line with the Street. Again, I could be fairly wrong, but the logic here and the data I am using would point to a substantial across-the-board miss.
Long-term, I have said that in five years I could see the stock reaching $1,000 on BEV and Energy alone (autonomy as a call option). My target on the stock is still $680 for the next 12 months. I am still a long-term believer in the narrative. But what happens if Tesla comes out and reports abysmally, as I expect? Does the market have enough trust in Tesla's management to be okay with a huge miss, or a miss in general? Keep in mind, the trading momentum has been based around a solid pair of quarters, Q3 and Q4 of 2019, not a proven track record of blowout numbers. In my opinion, expectations for the quarter have gotten overextended, and the stock will pay. If you're looking for an attractive entry in Tesla, you don't have to get in now.
Some "Bold" Predictions
- Tesla doesn't hit 500K units in 2020, much less "comfortably exceed."
- $1K/share in five years, reset to the $300s if I'm right on Q1.
First of all, I believe Tesla uses 500K units as the midpoint of a guided range, not the base of the guide. That being said, if the Model Y takes off this year, this number could be achievable.
As I mentioned in a previous report, my valuation gets me to ~$1K in five years. Discounted back to present value, that's how you get to my $680 price target. But if Tesla reports the numbers that I'm expecting it to report this quarter, and if there is any Q2 COVID-19 overhang, the stock could swiftly reset to its old trading pattern in the $300 area. This is the fundamental bottom I am looking for. When the stock resets, I am a buyer.
I'm a long-term bull, but am fundamentally skeptical of Tesla over the next couple of quarters. The ride higher in Tesla is not a sheer vertical. There will be speed bumps. Q1 and potentially 1H'20 could be a giant speed bump that gives investors an opportunity to buy in long-term. Until then, I'm on the sidelines with a hold rating.
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