Wall Street Vet Says Tesla Will Be Profitable This Fall

Tesla Model 3

JUL 4 2018 BY DOMENICK YONEY 29

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.

Source: Teslarati

Categories: Tesla

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29 Comments on "Wall Street Vet Says Tesla Will Be Profitable This Fall"

newest oldest most voted
ffbj

Happy 4th. Thanks to insideevs staff, for their dedicated, independent, thoughtful, and patient work.
(Btw 6000 not 600o)

Steven Loveday

Thank you, ffbj. We appreciate it. You too! Happy 4th to all.

tftf

“ was considered by many to be the top analyst covering Apple”

Please, Munster was completely wrong on Apple on several key issues for years.

One of the worst track records compared to other Apple analysts with actual sources in Asia (such as Kuo).

Google it if you don’t believe me.

Steven Loveday

The keywords here are “by many.” Many never liked Munster, while many others did. His track record wasn’t good for sure. But, Domenick doesn’t say that Gene wasn’t wrong. He’s just saying that there were people that liked him, as well as sharing the Apple connection for those unaware.

xm

Certainly his advice would be better than following Mr. Chanos’s.
It now may be coming to light that Mr. Chanos was willing to use targeted unethical activities including possible lies, slander and harassment of employee’s of companies he’s got a short position on, at least now questions are being asked. Was Mr. Chanos involved or was this behavior from a host of other short companies desperate to cover massive loss positions.

Clearly the whole short community needs a broad SEC investigation, in front running news, “news” purchases, and now harassment and Slander of targeted employees.

And ultimately, the lies did not match the reality of the company’s financials.

A hedge fund with no moral or ethical center, can bring everyone down with the fund manager.

xm
James

Headline should be: Some random noname dude who should have invested in Bitcoins instead of Tesla Says Tesla Will Be Profitable This Fall

Didier

Bitcoins ? Really ?

Gasbag

“Some random noname dude”

You should spend more time not under your rock.

Gasbag

“You should spend more time not under your rock.”

….on second thought never mind. Go back under your rock and you can check back in in a decade or so.

Justin

Comment should be: Some guy who is ignorant about the top technology analysts opens mouth and inserts foot.

CDAVIS

From article analyst Gene Munster, said: “… the evangelist effect.”
———-

Exactly…

I’m guessing each 1 new Tesla delivery leads to ~2.5 new Tesla converts vis-à-vis the Tesla evangelist effect.

Most Tesla owners are passionate about Tesla and very eager to share that passion… at a level unlike any other car brand. I’ve on several occasions let complete strangers drive off with my Tesla Model 3 for a test drive… yes nuts but not uncommon among Tesla owners.

The analyst referenced in the above article is smart to take into account this significant dynamic because for sure it’s a very big part of Tesla’s secret sauce and Tesla’s success that is overlooked by most analysts.

Most Tesla owners come to feel they belong to a special club that they are eager for others to join.

Charging at a Tesla Supercharger station for those occasional long distance trips… chatting with fellow Tesla owners from all walks of life at the Tesla charging stations… that act of charging becomes a special thing reserved for those in the special “Tesla Club”… there is no equivalent sense of fellowship at an ICE gas pump… a brilliant Tesla intended part of the “Tesla ownership experience”.

Another Euro point of view

Hope so as it would give incentives to OEM’s to release more EVs.

FreePat75014

If I follow his math, 48Ku of Model 3 in Sept Qtr, that should count typical 13 weeks, means <3700 per week on average. So he seams to apply a conservative # -62% capping to that Qtr vs the Burst rate of 6Ku end of August advertized by Elon. In Previous Qtr the 28578 units produced were just < 2200 M3/week, that compared to 5Ku burst rate in the last week was -56% off too…. So consistent and decently conservative, considering they ended June with 5Ku/w in the very last week only. If they can be profitable with that, then the odds the over-achieve it seams not negligible, counting that way.

Dan F.

<3700/week is -38% (NOT -62%.) off the projected "burst" rate of 6k/week. So it's substantially less of a "discount" off the projected Sept. burst speed than was the case for Q2 which was, as you indicated, -56%.

Doggydogworld

They already took half a week of, so 13 weeks is impossible. Gene used 4000/week times 12 weeks.

Terawatt

I’m glad to hear a veterinary thinks this beast is going to be well.

Terawatt

Slow news cycle when somebody thinks Tesla will be profitable is the entire story.

Niro should arrive soon. Isn’t it possible to dig up something there? Or, if speculation is all that’s available to report, at least give us some non-Tesla speculation, just to shake things up a bit?

Pushmi-Pullyu

I certainly hope he’s right, but if I had a nickel for every time a “respected Wall Street analyst” has been wrong about Tesla since 2007, then I’d have enough to buy a top-of-the-line, maxed out Model 3!

More to the point, Elon has been predicting for years that Tesla would turn the corner to regular profitability within 6 months. We have good reason to be highly doubtful of such claims.

Doggydogworld

With 48k Model 3s this quarter Tesla should be slightly profitable. Most sales will be higher margin AWD and P versions, which will overcome the additional labor cost of manual assembly.

The Q4 mix will shift down a little, as they resume sales of 49k base versions, but they can still be profitable at 60k Model 3s.

They need to get their automation working so they can sell short range versions. Otherwise they’ll have to delay SR again and start shopping LRs overseas.

arne-nl

“Elon has been predicting for years that Tesla would turn the corner to regular profitability within 6 months. “

Proof please?

Pushmi-Pullyu

Do you need help in using Google to find citations from previous years? If so, then:

1. Go to Google.com

2. Type in something appropriate in the search field, such as {elon musk predicts tesla profitable}

3. On the menu underneath the search box, click on “Tools”

4. Open the “Any time” drop-down menu

5. Click on “Custom range”

6. In the “To” field, type in any previous year from 2012 to 2017.

7. Click “Go”

8. Examine the search results and find lots of outdated quotes from Elon predicting near-term profitability for Tesla.

* * * * *

Don’t take my word for it! Try it for yourself.

But here’s one from 2009 that’s amusing in hindsight… and not in a good way for Elon:

https://jalopnik.com/5300053/elon-musk-smacks-down-eberhard-predicts-tesla-profitability-next-month

Another Euro point of view

🙂

JyChevyVolt

I think most people should be asking if Tesla will be profitable selling 35k-42k model 3. If yes then it’s game over and Tesla can get all the funding they would ever need.

This looks like video stores changing over to DVD when Tesla is starting a streaming service.

Counterpoint

Exactly. Most of Tesla’s expenditures have been serving the purpose of rapid growth in car, battery, and solar production, and expanding infrastructure, charging, and service. If they can stabilize as a company that can sell large numbers of electric cars, battery systems, solar panels, etc. at competitive prices and make a profit, then Tesla can revolutionize the transportation and energy landscape. But they have to prove they can do it.

Pushmi-Pullyu

“This looks like video stores changing over to DVD when Tesla is starting a streaming service.”

WOW! that is a great analogy.

May I steal it? 🙂

clasqm

Gene Munster spent FIVE YEARS predicting that Apple would produce a TV set and that it would be “the biggest thing in consumer electronics since the smartphone.” He’s a running joke in the Apple world.

But even a stopped clock is right twice a day, and one gets the feeling that Tesla either has to start making money or close the shop now. VC patience does have its limits.