Following Tesla’s Q1 earning report, we heard the steady drumbeat of “Monday Morning” quarterbacking from Wall Street Analysts.
With each pessimistic analyst report, the Tesla stock price fell, and Morgan Stanley’s Adam Jonas decided to outdo the rest of the pack, placing a $10/share bear case target on the stock price.
- Editor's Note: This article comes to us as an Op-Ed from Rodney Tanner. It originally appeared on his blog, Hot Rod (link not secure).
Driving this pessimistic outlook was the result of the Financial Analysts accepting the Short Seller thesis of demand having been either exhausted, or simply not present to maintain previous growth rates. This view was so broad in the Analyst community, that Adam Jonas was quoted by journalist Dana Hull as saying: “whisper number” on Wall Street is for deliveries to reach the mid to upper 70,000-unit range. (for Q2)
Tesla reported Q2 volume of 95,200 vehicles – and deliveries were constrained by supply – to exemplify this, deliveries outpaced production by 8,000 cars, and there were another 7,400 cars in transit! This does not even account for few deliveries yet within the UK and Standard Range Model 3 deliveries having barely begun in Europe.
Without the supply constraint, it would not be a stretch for Tesla to have delivered 100,000+ cars in the quarter – a striking 30-40% higher than the May whisper numbers.
What drove this gross miscalculation by the analysts?
Analysts fundamentally misread and improperly extrapolated from the Q1 results, specifically:
- Sales from Q4 to Q1 for any normal (even high growth company) should be expected to fall – not only is there seasonality in the car business, but there is also seasonality in many high tech businesses. Look at revenue for Amazon, Apple, Facebook, Google … every year (even from early on), Q4 peaks, Q1 retract, and the growth carries on. Companies like Oracle even tried to work around this by having their fiscal year end on May 31st.
- There was massive consumption of demand in Q4 as a result of the end of the tax credit … but this was a temporary pull-in of demand – people that were on the fence in the short term pulled the trigger to buy – it had no underlying effect on demand beyond Q1 … by the time Q2 rolled around, there was already a new set of customers in the market for a new car.
- The time required to expand inventory to support Europe and China is real and temporary – a normal company would have taken a solid quarter to stage and position inventory in these regions – Tesla’s using its limited supply to keep up North American deliveries, while positioning and making substantive deliveries in Europe and China within Q1 is nothing short of remarkable – and any shortfall in deliveries to position inventory is an investment in these markets.
- Expectations for reduced margin contribution from the Model S and Model X are meaningless for the overall valuation of Tesla. Tesla does not strive to be a BMW or Mercedes, car businesses built on moderate volume of high priced high margin cars … Tesla’s master plan has always been focused on large volume, and as such, success will not come from selling a small number of high-profit premium vehicles – the S and X were always, and will always be flagship cars that are intended to create an overall halo effect for the balance of Tesla cars
- Reduced margin contribution from lowered Model 3 pricing in 2019 is also meaningless for the overall valuation of Tesla. Tesla’s unit profit is not fixed, and the single greatest contributor to reducing unit cost is increasing volume.
While everyone wants to find a Tesla competitor, the legacy OEMs simply have no real EV alternative for any of the Tesla models
- There is not a single EV currently available with a 300+ mile range – S3X all have variants with 300+ mile range – real or not, customers want range, and range “size” matters
- At the low end, the cars are simply unappealing … the only reason consumers are buying the Bolt, i3 or LEAF is price, brand loyalty, or lack of awareness of Tesla – none of these cars are compelling, and even with the large distribution capacity of OEM dealerships, sales volumes have reflected an outright customer rejection of these vehicles.
- While some more interesting cars are starting to hit the market at the higher end (Jaguar, Audi), these cars still fall short of the S and X on critical dimensions like range, efficiency, speed, software, charging network, and design. In addition, Audi’s marketing of the e-tron provides an overall lift for EVs, and will yield a free uplift for all EVs (including Tesla)
Upcoming planned EVs from legacy OEMs are interesting, but their impact on Tesla is grossly overstated
- Everyone might as well pack it up if we're assuming the market for EVs won’t grow – a small future EV market share for Tesla is far more attractive than massive current market share. (would you prefer to have 90% of $100,000 or 10% of $1,000,000,000)
- There are no shortage of news releases about future “Tesla Killers” – what is remarkable is that even with the incredibly poor timeline accuracy of Elon Musk, these other OEMs have even worse track records.
- Making a case that future capabilities from legacy OEMs will be better than current capabilities from Tesla seems to ignore the obvious – Tesla’s future capabilities will be improved from their current ones!
Feature critiques and quality issues are exaggerated
- Some criticize the door handles of the Tesla, or the centralized screen user interface, or the lack of CarPlay, but what we are seeing is the “Blackberry keyboard effect”: analysts and journalists were quick to highlight the lack of a keyboard on the iPhone, competitors were quick to copy the Blackberry keyboard with an Android version (or other OS). Step changes always include tradeoffs — and the step-change is only mass adopted if the benefits overwhelm these tradeoffs. Talking head opinions will never accurately judge the likely success of these step-changes. The only success criteria is consumer demand. There can only be one conclusion as to the dramatic step-change in the design of the Model 3 – based on customer demand, people love it!
- In today’s social media age, any person can find a customer with a quality complaint with any product – this does not mean the complaint is false, but there is a big difference between individual examples of issues and overall systemic issues – keep in mind, few are interested in hearing about one-off quality issues with BMWs or Hondas, so instances of quality issues with a Tesla receive coverage, while corresponding issues with other cars receive no coverage. Does Tesla need to do a better job with quality – yes, but if the quality issues were systemic, Tesla would lose its #1 and only marketing tool – existing customers.
What’s the outlook beyond Q2
At the end of Q2, Wall Street analysts were acknowledging likely higher deliveries, and the resulting headlines will likely be “Tesla meets Q2 forecast” – a gross mis-characterization of analyst opinion mid-quarter when far less public information was available.
In contrast to these views, Financial Analysts are missing key, very tangible demand/profit drivers that will be realized in the coming quarters, including:
- Likely to occur in Q3: Ramp up of SR+ sales in Europe
- Likely to occur in Q3 or Q4: Benefit of inventory available throughout the quarter in Europe and Asia
- Likely to occur in Q4: Annual holiday effect
- Likely to begin in Q4: Ramp up of made in China Model 3s
- Likely to begin in Q4: Release of Model S/X refreshes
- Likely to occur in Q4: Expiring tax credit
- Could begin anytime: Revenue source from annual fee for Internet access within cars
- Ongoing: Continued build efficiencies
- Likely to occur in 2020: Battery technology advances to drive down per-kWh costs, and increase energy density/range
- Likely to occur in 2020: Model Y release
None of the above depends on the release of the Pickup or the Semi, any improvements to Autopilot, revenue from insurance, revenue from the self-driving fleet or other possibilities. It's simply difficult with any realistic review of Tesla’s current position, to be anything but bullish about its demand and profit outlook … and that’s in the short term …
The medium/long term is even more favorable – it can be argued that the legacy OEMs have up to 5-8 years to make a competitive move on Tesla. Otherwise, it will be game over … why … within 5-8 years, there will be two key strategic changes few are heavily talking about:
- Heavy and real constraints on selling gas cars in many large markets
- Current 15-30-year-olds will become a larger car buying segment – and Tesla is their unquestionable preferred brand
Financial Analysts can continue to take the easy path and measure Tesla based on highly myopic, cynical perceptions of Tesla or take a hard look at what is really happening in the marketplace to understand why Tesla has achieved the success it has, and the implications this has for its future growth.