Tesla Model 3 deliveries only up 3% sequentially despite entry into various new markets

Whitney Tilson’s email to investors discussing why are i-Pace and e-tron sales so weak in the U.S.?’ Analysts on Tesla Inc (NASDAQ:TSLA); recognizing emission credit revenue.

emission credit revenue

dominickvietor / Pixabay

1) My analyst Kevin asked Anton Wahlman:

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Still trying to figure out why I-Pace and e-tron sales in the US are not great given the 7500K tax credit. I would guess for the I-Pace it’s the Jaguar brand combined with the glitchy infotainment system, but for the e-tron I don’t get it.

The Model S and X are clearly long in the tooth, but they easily outsell these two models with a much lower tax credit.

I totally get both of your points that it is not about the e-tron or I-Pace, but the hundreds of EVs coming down the pike (and this is the most compelling part of the short thesis from my perspective), but just trying to figure out what is going on here.

I know Anton follows this way closer than me. Does this have something to do with the e-tron recall or battery shortages? What about the I-Pace. I look forward to your thoughts.

Here was Anton’s reply:

When it comes to the Jaguar i-Pace in the U.S., the biggest issue is a combination of the Jaguar brand position in the U.S. market, and general lack of consumer awareness of the product’s existence.  We are knee-deep into this thing and know all about it. Most general consumers barely think Jaguar exists anymore, or are more aware of the “electrical problems” of Jaguars from the 1970s and 1980s.

Objectively, as far as the product is concerned, the car is one of the smaller SUVs, but not so small that it wouldn’t find a market.  The infotainment system is just fine, especially as most people use Android Auto and Apple CarPlay anyway.

When it comes to the Audi eTron in the U.S. market, I think it was mostly about the disappointing headline range number (204 miles).  Most people don’t understand the reserve, or appreciate the longevity and serviceability built into that battery pack. So, they think 204 miles is 30 miles worse than the Jaguar’s 234 miles.

Real-world tests have shown the Audi and Jaguar delivering similar range in practical driving, so the Audi number understate the “broad apples to apples” probably by approximately 10%.  Yet, it became a headline and doesn’t look good.

I think the bigger explanation resides in the comparison between how both the Jaguar and Audi numbers look in Europe versus how they look here in the U.S.  In Europe, they are considered larger cars than Americans do. They are also not as concerned with range, as European usage patterns tend to be much shorter.

Perhaps most importantly, Audi and Jaguar are “home” European brands, which if you combine that with caution regarding Tesla’s ability to service and repair in a timely manner, lead to superior sales numbers over there.  The Audi has the same range number, and the Jaguar has the same infotainment system, in Europe as they have in the U.S.

Audi has also launched a lower-range version of the eTron in Europe.  They are starting to take orders now, and volume deliveries are scheduled to begin when the European EV quotas take into effect, which is January 1.  With the lower price, sales of the Audi eTron could easily double in Europe, compared to the last few months.

Here are the Audi 2019 numbers:

Audi eTron 2019-01 2019-02 2019-03 2019-04 2019-05 2019-06 2019-07 2019-08 2019-09 TOTAL
Germany 407 155 478 174 322 246 530 366 2678
Norway 8 110 680 371 530 598 527 457 506 3787
Sweden 0 25 47 43 80 75 49 75 87 481
Netherlands 2 0 40 55 160 102 118 86 142 705
Belgium 13 40 59 59 100 271
Switzerland 0 0 93 33 48 58 77 127 436
Austria 0 0 53 19 36 38 78 224
France 0 14 140 22 17 30 223
Italy 0 10 39 12 11 6 0 78
Spain 0 9 62 14 6 22 15 7 7 142
Denmark 0 0 2 8 16 28 20 22 96
Finland 0 14 9 10 13 24 70
Iceland 0 0 4 6 7 8 25
Ireland 0 0 7 6 3 4 13 33
Slovenia 2 2
EUROPE 430 377 1713 832 1349 1239 1427 1142 8509
"Missing" Euro 1 10 78 121 127 300 329 150 1116
USA 0 0 0 253 856 726 678 593 434 3540
Canada 113 113
N. America 0 0 0 253 856 839 678 593 434 3653
TOTAL 430 377 1713 1085 2205 2078 2105 1735 434 12162
Carsalesbase 431 398 1791 990 1200 1554 1715
EV Blogspot 431 387 1791 953 1476 1539 1756 1292 8333
Europe YTD 431 818 2609 3576 5061 6600 8356 9648
New Zealand 28 30 58
Europe 431 387 1791 953 1476 1539 1756 1292 9625
N. America 0 0 0 253 856 839 678 593 434 3653
TOTAL 431 387 1791 1206 2332 2378 2434 1885 434 13278

And here are the Jaguar 2019 numbers:

Jaguar iPace 2019-01 2019-02 2019-03 2019-04 2019-05 2019-06 2019-07 2019-08 2019-09 TOTAL
Germany 16 92 106 85 86 56 89 82 612
Norway 79 391 442 350 510 331 133 231 189 2656
Sweden 16 11 33 33 23 9 13 11 13 162
Netherlands 15 5 40 11 26 13 16 32 39 197
Belgium 36 50 61 62 37 246
Switzerland 14 39 70 69 55 41 31 26 345
France 31 47 42 53 39 40 252
Italy 12 14 29 20 22 17 19 4 27 164
Spain 19 27 20 6 22 16 20 6 5 141
Portugal 20 34 44 46 48 50 44 39 325
Finland 19 11 7 16 13 1 67
Denmark 0 15 10 16 4 16 1 5 67
Austria 15 25 28 39 20 16 143
Iceland 3 4 5 6 7 8 33
Ireland 6 7 5 3 4 4 6 35
Czech 1 2 3 7 12 25
Russia 15 13 11 10 49
EUROPE 317 787 956 832 928 618 372 436 273 5519
"Missing" Euro 245 147 604 397 424 448 449 280 2994
USA 210 186 212 237 228 236 213 160 160 1842
TOTAL 527 973 1168 1069 1156 854 585 596 433 7361
Carsalesbase 528 872 1503 1195 1375 1004 774
EV Blogspot 562 934 1560 1229 1352 1066 821 716 8240
Europe YTD 562 1496 3051 4284 5637 6703 7524 8240
New Zealand 0 3 0 0 0 46 5 7 61
Europe 562 934 1560 1229 1352 1066 821 716 8240
USA 210 186 212 237 228 236 213 160 160 1842
TOTAL 772 1120 1772 1466 1580 1302 1034 876 160 10082
Official 1011 1388 2044 1419 1594 1621 1109 10186

2) Below are various analyst reports from yesterday on TSLA’s delivery number:

Street Takeaways - Tesla Q3 Deliveries

Thursday, October 03, 2019 04:20:59 PM (GMT)

  • Overview:
    • Shares are trading lower (6.0%) this morning following TSLA's Q3 production and deliveries update, prompting some pessimism on the Street regarding forward outlook as deliveries of 97K missed the heightened 100K threshold, despite it being a record deliveries number. Deliveries on luxury Model S/X's were down (2%) sequentially, missing consensus by 280 units, while Model 3 deliveries were 2,590 units above consensus at 79.6K.
    • Some analysts are emphasizing the proven market demand for the Model 3, while some express skepticism regarding future growth opportunities, as Model 3 deliveries were only up 3% sequentially despite entry into various new markets. Analysts are also mixed on the projected effect of increased lease rate on revenues, with some analysts viewing it as a tailwind to financials while others expect it to weigh on revenues due to management's indication of inability for lease end buyout. Going forward, analysts point to TSLA's ability to both generate and meet demand to drive future growth, as the autonomous/ADAS space becomes increasingly competitive. Some analysts are looking to see if the Chinese market and Giga 3 factory in China prove to be sufficient demand generators to offset the stalling growth in mature markets.
  • Valuation:
    • Current valuation vs 5-year avg & sector avg
    • P/E NTM 130.1x vs 184.2x & XLY avg 19.4x
    • EV/EBITDA NTM 16.2x vs 29.6x & XLY avg 12.5x
  • Sell-side ratings:
    • 35% Buy, 32% Hold and 32% Sell rated vs Motor Vehicles peers ratings mix of 45% Hold, 41% Buy, and 14% Sell rated.
    • The average target decreased (0.4%) to $268.82, implying an +17.4% premium to this morning's levels near $243 and compares to Motor Vehicle peer's implied return of 20.3%.
  • Forward Estimates:
    • FY19 (Dec '19):
      • Revenue $24.50B, +14.2% y/y
      • EPS ($4.20), +216.1% y/y
    • FY20 (Dec '20):
      • Revenue $30.21B, +23.3% y/y
      • EPS $3.58, (185.1%) y/y
  • Analyst Commentary:
    • JMP Securities analyst Joseph Osha-lowers rating
      • As previously reported, downgrades to Market Perform rating from Outperform as they question whether demand growth generation might be leveling off, due to inability to identify operational deficiencies that would have prohibited the production of additional units had the demand been there - notes this is an issue to valuations, which have been using forward multiples.
      • Notes production of 96.2K essentially equated to Q3 deliveries of 97K, indicating TSLA may be preparing for a less dramatic Q4 due to lagging inventory buildup.
      • Expects FY20 Model 3 deliveries to grow at a more modest rate, (59k) units than previous estimates, revising down expected figures for revenue, and EBITDA by ($2.7B) and ($675M) respectively; highlights Model 3 now accounts for 80% of business, making it primary catalyst for overall performance.
      • Lowers rating to Market Perform from Market Outperform.
    • RBC Capital Markets analyst Joseph Spak
      • Emphasizes that media report of email leak skewed expectations bullishly, with Q3 deliveries of 97.0k were in line with estimates, and +2% consensus, yet failing to reach the whisper target of 100k
      • Notes that generalization of sales masks regional performance, with growth in Model 3 deliveries in regions like the Netherlands and the UK masking poor performance in mature US market.
      • Highlights increase in model leasing - Model S/X to 15% from 10%, Model 3s to 8% from 5.6% - will have impact on revenue; notes unknown effect offset from Smart Summon feature roll-out, but expects no boost to cash flow.
      • Emphasizes that while Q3 deliveries of 97.0k were a record performance, to hit low end of FY19 guidance of 360-400k deliveries, Q4 needs to reach 105k units - +8% of Q3 - notes bulls highlight increase in order backlog as possible catalyst
      • Believes auto revenue will report q/q and y/y declines, despite record deliveries; points to deliveries outpacing production - two quarters in a row - as possible risk given unexpected demand increase.
      • Target at $190 - based on 10x exit 2028E EBITDA; maintains Underperform.
    • Nomura Instinet analyst Christopher Eberle
      • Highlights Tesla's US Model 3 sales has maintained its > 50% of market share in the entry luxury sedan segment since 4Q18, demonstrating continued consumer enthusiasm for both the model and the overall TSLA brand.
      • Believes increase in leases to be a margin tailwind, as lease accounting produces higher gross margins than cash sales noting gross margin in Q2 for lease was 49% vs 17.7% for cash sales.
      • Expresses optimism regarding TSLA's acquisition of DeepScale, viewing it as an acqui-hire that will readily integrate with the in-place Autopilot group and advance self-driving efforts.
      • Price target at $270 - based on 9.0x FY21 EV/EBITDA; maintains Neutral rating.
    • Cowen analyst Jeffrey Osborne
      • Highlights Q3 growth for Model 3 deliveries was +42% y/y - due to all sales being in N.A.- but only 3% q/q despite entering multiple new markets, while Model S/X sales were down 2% from Q2 and 37% y/y.
      • Surprised by the 8% rate of lease on Model 3's due to prior indications by management that lessee's would be devoid of buyout option at end of term.
      • Believes inventory to be down 4% sequentially given production numbers, based on estimates that ~8.5K Model S/X and ~15K Model 3's either unsold or in transit.
      • Skeptical on projected demand growth in Chinese market - due to low visibility - for locally produced Model 3's, and it's ability to account for plateaus in maturing markets, and ramifications of the expiring US tax credit in 1Q20.
      • Target at $140 - based on 12x FY21 EV/EBITDA; maintains Underperform rating.
    • Needham analyst Rajvindra Gill
      • Expects declining Model S/X sales and lowered Model 3 ASPs, to be a significant headwind to gross margins, given S/X current margin range of 25-30% on higher price points, and Model 3's volume at 79.6K out of 97K.
      • Believes TSLA's competitive advantage in ADAS/autonomous driving space is fleeting, as leading OEM's such as Toyota and Mercedes begin to offer L2+ Advanced options.
      • Cautious regarding TSLA's capital structure and ability to maintain positive FCF despite the recent equity financing period, given decelerating revenue and margin pressure.
      • Maintains Underperform rating.

Industries: Auto & Truck Manufacturers

Primary Identifiers: TSLA-US

Related Identifiers: TSLA-US

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From Weiss Harrington:

Last night, Tesla (TSLA) announced third quarter deliveries totaled approximately 97,000 vehicles – 17,400 Model S/X and 79,600 Model 3.  While consensus delivery expectations were roughly 96,000, a ‘leaked’ e-mail from Elon Musk widely circulated last week boosted expectations, stating “We have a shot at achieving our first 100,000 vehicle delivery quarter, which is an incredibly exciting milestone for our company!”  The e-mail sent shares from $228.70 last Wednesday to $242.56 by the close last Thursday, only to see reality set in today ($229.05 currently).  Once again Elon Musk is creating needless volatility.

Model S and X deliveries were disappointing – coming in at 17,400 versus 17,722 last quarter and our expectations of 19,100 - a major blow to Tesla’s hopes of being profitable in the third quarter:  Model S and X profitability are roughly 3X that of the Model 3 (in terms of gross profit in dollars).  The following table shows Tesla’s ‘Model S Equivalent (MSE)’ sales, a construct we believe is useful in translating delivery data into profitability:

Model S Sales

As the above table shows, we estimate Tesla’s third quarter ‘Model S Equivalent (MSE)’ sales increased from 41,149 in the second quarter to 41,636 vehicles in the third.  While we do not yet have European sales data for September  (which helps reconcile Asian and North American Sales) or complete estimates for third quarter vehicle options uptake, we currently estimate Tesla will report a third quarter GAAP loss of $1.47 per share excluding ZEV or European emission credit revenue (but including $108 mln of GHG credit revenue).  We should also point out that third quarter earnings were significantly by adverse currency movements, which reduced earnings by an estimated $87 mln (or $.48 per share).

We believe Tesla has a great deal of flexibility in recognizing emission credit revenue as well as in harvesting the nearly $300 mln of one-time restructuring charges taken over the past two quarters, including the $121 mln lease vehicle write-down in the first quarter.  That said, trying to make the third quarter profitable is a bridge too far – even for a company with a 34 year old CFO - therefore we forecast Tesla will only harvest $35 mln of ZEV/European emission credit revenue in the third quarter, resulting in a headline GAAP loss of $1.27 per share on revenue of $6,436 mln.  Consensus expectations of call for GAAP earnings of $-1.48 per share on $6,360 mln revenue.

Turning to cash flows, we were surprised (and perhaps Tesla was too) that production (96,155 vehicles) was inline with deliveries (97,000 vehicles).  Given Tesla began the quarter with an estimated 10,300 Model S/X vehicles in inventory and an estimated 14,800 Model 3s in inventory – all of which were likely written down in Q1 and Q2 – we expected an inventory reduction of several thousand vehicles, significantly boosting earnings and leading to positive cash flows.  As this did not happen, we currently anticipate third quarter cash burn of $270 mln rather than breakeven free cash flow which could have been achieved by liquidating 5,000 or so vehicles.

Conclusions

Tesla’s third quarter delivery announcement leaves us with the view that consensus estimates for the quarter are roughly inline – meaning we see no opportunity for a trade into the quarterly results in either direction (technically Tesla could achieve third quarter profitability, but they would need to record roughly $250 mln of ZEV/European emission credit sales and/or accounting manipulations).

We currently anticipate we will downgrade Tesla shares to ‘Sell’ either on a meaningful share price rally (above $260) or – more importantly – as we move into 2020 and Tesla faces the expiration of U.S. EV buyer tax credits as well as increased competition from other manufacturers, most notable Porsche.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver