Tesla: How Q2 Could Get Worse

Summary

• Revenues projected to fall by nearly 25% year over year.
• Demand in question due to price cuts, delivery estimate timelines.
• US Dollar strength an added headwind, especially as China ramps.

It's not really a surprise that Q2 results for electric vehicle maker Tesla (NASDAQ:TSLA) are not likely to look good. With the coronavirus pandemic shutting down the Fremont factory for roughly half the quarter, production will certainly be impacted. On the other side of things, global economies showing massive GDP declines are leading to significant reductions in consumer spending. As bad as the quarter looks to be so far, there are still a few things that could make things worse during the last month of this period.

In the chart below, I wanted to show how the revenue figure for the period looks in comparison to the past five years. As you can see, Q2 2020 would be only the second quarter in this period where the top line decreased, and three of the weakest four growth periods would be in the past 12 months. Some growth is expected to resume rather quickly, however, with the current expectation that both Q3 and Q4 of this year will see year over year revenue increases of more than 15% each, but those numbers would still be well below the longer-term average.

(*Current street average estimate. Source: Seeking Alpha earnings page)

I want to start with perhaps the second biggest risk to Tesla's results in the short term, and that is a lack of demand. The production-constrained narrative from the bull camp has all but been destroyed for now it seems. On Tesla's Model 3 order page, delivery estimates for the US East Coast are down to 2-4 weeks for the Standard Range Plus variant, and 1-4 weeks for the high-end Performance version. When you consider the time needed just to produce a vehicle and ship it across the country, this would seem to imply that demand is rather low. The recent round of price cuts adds to that notion.

The situation is even more interesting when we look at Tesla's newest vehicle, the Model Y. The order page for this vehicle shows a delivery estimate of just 4-8 weeks now, which is down from 8-12 weeks seen last week. Considering that CEO Elon Musk said that the Model Y would outsell the Model S/X/3 combined, this delivery timeline doesn't bode well for sales at the moment. Of course, Tesla will likely slash prices and come out with more cheaper variants over time, but it was about 15 months of the production ramp before Tesla came out with the mid-range Model 3 variant. Given the factory shutdown, the Model Y has likely only seen about a month or two of meaningful production so far.

Of course, Tesla bulls also have to be aware that competition and certain tax incentives provide another headwind. The company already had to lower prices in China to get the base model under the subsidy limit price, and the two more expensive models produced there won't qualify after the transition phase ends in a few months. At the end of the year, the Netherlands EV tax break comes down another notch, and a major EV benefit expires in Norway. We're also about to see the launch of the Volkswagen ID3 (OTCPK:VWAGY) in Europe, with the Polestar 2 hitting global markets a few months after that, and the Ford Mustang Mach-E (F) before the end of the year.

I started with the second biggest risk because the biggest one has do to with that Fremont factory itself. If the facility is forced to close down again or to significantly reduce operations due to the coronavirus, Tesla would find itself in a rather dire situation. In a previous article on this name, I discussed the company's blog post regarding its reopening of the factory, which compared Fremont's county of Alameda against some others in terms of CV-19 cases. As you can see in the updated chart below, the number of cases in Alameda County continues to be well above those other three areas.

(Source: USA Facts coronavirus tracker, seen here)

As of Monday, Alameda County had a little under 3,500 total cases to date. With a population of over 1.67 million, that implies about 1 in 482 people have tested positive so far. While that doesn't seem like much, consider the fact that the Fremont factory employs more than 10,000 people. Simple math tells us that at least some employees have or have had the virus, and if not, it won't be long until some do. Considering how Ford recently had to idle two plants because of positive tests, it's not a stretch to think Tesla could have to as well, especially if another wave of cases hits the area.

One other item that will hurt purely in a financial sense is the stronger US Dollar. Through Friday, the average close of the Dollar against the Euro this quarter was 1.35% higher than the full Q1 average, and 3.55% higher than the British Pound. While sales to Europe won't be as much as they have been in prior quarters, Tesla will generate less revenue in these countries from a stronger dollar where sales prices have remained constant over time.

Perhaps the most important currency to watch currently though is the Chinese Yuan. Over the past few weeks, we've seen increased political tensions between these two nations due to the coronavirus, Hong Kong situation, etc. This has resulted in a rally for the greenback to multi-month highs against the Yuan, with the average close this quarter set to be its highest since Tesla started Model 3 sales in China last year (first imported, now built there). When you combine a stronger dollar with the recent price cut, the selling price of the base Model 3 built in China comes down about $5,300 when translated for revenue purposes.

(*Through 5/29. Data sourced from Yahoo! Finance)

Tesla also has to be careful that it doesn't incur too much bad press that harms its brand moving forward. Just on Monday alone, a video of a Model 3 on Autopilot crashing went viral. That follows up a recent piece from Consumer Reports that was extremely negative on the company's driver assistance features. Also, the company announced a new package that customers have to pay for and install themselves to deal with paint issues that are likely due to poor build quality. Finally, it was revealed that Tesla's Buffalo factory remains well below its jobs required threshold, as New York State continues to get almost nothing back for its billion-dollar investment.

While Tesla's second quarter is likely to be the toughest period we've seen in some time, there's still a month to go and things could easily get worse. Falling order times and price cuts seem to imply demand is not very strong currently, and production could be halted again if the Fremont factory is hit by a wave of coronavirus cases. With the dollar strengthening over Q1, revenues are also going to be dinged a little more. Tesla shares have been rather resistant this year despite a number of troubles, but if the current situation worsens further, it will be interesting to see how many bulls hold on.

Analyst’s 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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