Merrill Lynch Attacks Tesla

Merrill Lynch Attacks Tesla

In mid-November, Daily Kanban put out a skeptical Tesla piece titled "Brokerage: Tesla could be sitting on 3,000 unsold cars."

The Daily Kanban articles draws info from John Lovall, a research analyst at Merrill Lynch.  The article states:

"The Rule of Scarcity plays a large role in the persuasion process, as any pop psychologist can confirm. Nobody knows that better than master salesman Elon Musk. Waiting times for a Tesla are legend. If you believe the on-line chatter, the Model X is basically sold out for 2015. Is the scarcity for real? John Lovallo, a research analyst at Merrill Lynch, wanted to find out."

"...Lovallo was told by Tesla that “essentially, in the third quarter, we sold every car that was. Including cars in, like, showrooms, and everything we basically had.” But then, Lovallo started going through the books, and he found that “Tesla’s finished goods inventory at the end of 3Q appears to tell a different story.”

"According to Merrill’s estimates, Tesla could have “approximately 3K vehicles stocked in inventory or in transit,” the brokerage house writes in a research note distributed to clients. Merrill maintains an “underperform on Tesla.” In the euphemistic world of research notes, this translates to “sell as long as there still are greater fools around.”

And concludes:

"All of it has the smell of sales not going as smoothly as they used to, and of Tesla finally getting some pressure to produce real returns on the exuberant investments."

Meanwhile, Merrill Lynch's note to investors states:

“Tesla has found it challenging to earn money on its vehicles, which could ultimately prove to be the biggest risk for the company and the pure electric vehicle market at large.”

Clearly then Tesla is doomed, right?  Wrong...says Forbes, who countered the Tesla hit piece with facts.

Forbes

"Odds are you’ve never heard of John Lovallo, the Merrill Lynch auto analyst, but you can bet Elon Musk has. Back in February, Lovallo suggested Tesla was worth just $65 a share a day after it had hit an all-time best $265. In the ensuing 9 months, the stock has mostly traded sideways, closing above $251 yesterday. But Lovallo is convinced the worst is still to come."

"In a research note to clients, parts of which were published in the Daily Kanban, Lovallo came just short of accusing Musk and company of outright lying during Tesla’s third-quarter conference call. The note claims inventories are rising, Tesla is failing to make inroads in China and then ranges into some downright bizarre claims about the profitability of the Model S itself. Tesla doesn’t reveal quite enough in its regulatory filings to take down every one of Lovallo’s claims, but this will come close."

CLAIM: Inventories are piling up.

REALITY: Actually they’re down.

Tesla sold 7,785 cars in the third quarter, just a hair under the 7,800 it guided to at midyear. But because it had to shutdown its lone factory for about twice as long as planned — close to one month — production fell well short of goals. Here’s what the company said:

Our third quarter production was about 7,200 units which was — as we said about 2000 units less than our plan for third quarter. — Depak Ahuja, chief financial officer

Essentially in the third quarter we sold every car, that was including cars from like showrooms and everything we basically had. There was just nothing left to sell. — Elon Musk

In other words, to sell 600 more vehicles than the company made, it had to chip into inventories any way it could.

Typically, if you can discredit one claim made by an analyst, then that's sufficient enough to make all claims by that analyst suspect.  However, Forbes didn't stop there.  Forbes goes on to discuss Tesla's too-long delivery chain, which accounts for these "unsold" Teslas by claiming "3,000 Teslas are headed somewhere as we speak, not yet delivered to customers."  Forbes concludes:

"This would be bad for the company if it was news. It’s not. Last quarter, Tesla’s finished goods were $250 million so they are actually lower by about 10%. That’s completely consistent with Tesla’s story of selling everything that wasn’t nailed down. It’s completely inconsistent with Lovallo nearly calling Musk and Ahuja liars."

Discrediting analysts with facts.  Forbes shows us how it's done.

We highly suggest you read both source articles in their entirety by following the links below.

Sources: Daily Kanban & Forbes