Wall Street Vet Says Tesla Will Be Profitable This Fall
The key lies in hitting weekly 6,000 Model 3 production rate.
In the face of much skepticism, Tesla CEO Elon Musk has repeatedly stated that the automaker will see a profit in the 3rd and 4th quarters of this year. Now, a respected financial analyst is saying the same thing.
Gene Munster, who left the investment banking firm Piper Jaffray after 21 years to start Loup Ventures in early 2017 with a couple of his co-workers, was considered by many to be the top analyst covering Apple and other tech companies. He’s written a research note following the release yesterday of Tesla’s Q2 production figures that’s worth spending some time with, and we’ve included it in its entirety below.
Additionally, as reported by Teslarati, he appeared on CNBC where he said the following:
“This 5,000 production number was the first time in about nine months he’s gotten one right. I think it’s safe to always dial back what he’s saying, that’s why we think Tesla’s going to meet the production number by the end of the September quarter. If they hit that number, it’s going to equate to 48,000 model 3s produced in the September quarter. That should get them to profitability, slightly profitable. It’s not going to be wildly profitable in September; I just want to warn everyone, but it moves them in the right direction.”
Basically, his position is that the California automaker will see profitably — barely — by the end of September if the company hits the 6,000 Model 3 weekly run rate that its Q2 production press release claims will happen in late August. He also believes Tesla will cash flow positive in Q4 as well.
Interestingly, he sees Tesla’s Model 3 reservation list positively, despite its decline from 455,000 to 420,000, noting that about 28,386 of those have already been delivered. This is because he believes in the evangelist effect. Similar to how early Apple iPhone users converted so many others to the new (at the time) smartphone, he believes increased deliveries also means an increase in the number of people who will evangelize on behalf of the company, thereby increasing orders. We concur, but with a caveat: the ownership experience must also be a positive one. If people taking delivery now receive cars that need to make multiple trips to service centers, then that goodwill could go to waste.
Tesla released Q2 2018 production and delivery numbers, confirming information leaked over the weekend that they did indeed achieve their goal of 5,000 Model 3s per week, producing 5,031 Model 3s and 1,913 S and X vehicles. These numbers are in line with Musk’s target and slightly ahead of our previous prediction of a run rate between 4,300 and 4,900. Other key takeaways include:
- Model 3 production for Q2 was 28,578, nearly 3x higher than Q1 production of 9,766.
- The company did not steal from Peter to pay Paul, producing 24,761 S and X vehicles in Q2 compared to 24,728 S and X vehicles in Q1. We’re encouraged that this number remained stable during increased efforts to reach Model 3 goals.
- Tesla reiterated their confidence in reaching both positive GAAP net income and cash flow in Q3 and Q4. Adding some conservatism to Musk’s predictions, we expect the company to be cash flow positive in Q4 through a combination of a higher Model 3 run rate and selling EV credits.
- After presumably reaching the 5,000 per week target in a burst-build, a short period of pouring resources and manpower into focused production, the question becomes one of sustainability. Tesla commented that they are on track to reach 6,000 Model 3s per week by late August. We expect a temporary step-down in production related to retooling general assembly and we anticipate Model 3 production to exit Q3 at 6,000 per week.
- Tesla reported that the number of net Model 3 reservations at the end of Q2 stood at roughly 420,000 (on top of the 28,386 delivered to date). We see this as a positive; we had expected the reservation list to shrink meaningfully given the production delays. Now, we expect reservations to increase as more owners become evangelists for the product and cars become available for test drives in Tesla stores.
This strong demand comes into question when considering the effect of the tax credit provided to EV buyers in the US. When Tesla delivers its 200,000th vehicle, this $7,500 tax credit will begin to phase out. The number of vehicles in transit (11,166 Model 3s and 3,892 S and X), along with accelerated deliveries in Canada, could mean Tesla was delaying deliveries in order to game the tax credit. This points to the fact that they should deliver the 200,000th vehicle early in Q3. If that mark is hit early in Q3, the tax credit phase-out will look like this:
- For the rest of Q3 and all of Q4, customers will receive the full $7,500 credit.
- In Q1 and Q2 of 2019, the credit will be reduced to $3,750.
- In Q3 and Q4 of 2019, the credit will be halved again to $1,875.
- After the end of 2019, the credit will disappear altogether.
Because the tax credit artificially lowers the price and therefore increases demand for Tesla vehicles, future demand may be sensitive to decreases in the tax credit. The good news is that there will be increased demand in the short term (remainder of 2018) once consumers realize the credit will disappear. On the other hand, future demand has been pulled to the present, so Tesla may face a headwind in 2019. We are modeling for decelerating sales growth in 2019 as the tax credit steps down and eventually goes away.