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Tesla follow-up

August 2, 2018

Quick take on where this is going. [update 8/5/2018 – added notes on leasing]

Q2 Earnings report highlights:

  • reached “5000/wk” manufacturing capacity goal
  • $2.2B cash
  • $4B revenue
  • $717 MM loss
  • model 3 GM “slightly positive”, forecast for 15-20% in Q3-Q4
  • Q2 production model 3: 28k produced, 18.5k delivered
  • Q3 forecast production model 3: 50-55k

The good:

  • reached production goals
  • positive GM (gross margin)
  • reduced capex
  • next 2 quarters will look good

The bad:

  • they have under a year at the current burn rate, so they MUST increase GM’s.
  • Due to economy of scale, we will see some of this. However…
  • GM’s issue #1: Tesla’s GM’s are not apples-to-apples vs other auto manufacturers, because no dealer network. Tesla’s revenue is what customers pay. Other manufacturers’ revenue is what the car dealerships pay, a discount in the 10% ballpark. Once Tesla consumes its pre-sales, it will have to eat the cost of its own sales process one way or another.
  • GM’s issue #2: At the end of the year, Tesla’s GM’s will be hit by the expiring $7500 tax credit (they will still get it in Q3/Q4). For a vehicles priced at $100k/$50k/$30k, this is a 7.5%/15%/30% effect! This might be why there are no signs of the $30k model 3 any time soon. If they “expect” 20% GM on a typ. $50k-priced model 3 during Q4 (with the credit), then that becomes 5% in 2019.
  • Long term prospects: Are they really going to sell model 3’s in quantities approaching 200k per year? (at the same time as maintaining their healthy model S/X’s luxury line?) With a $35k model 3 I do believe they could, but they would lose money on it. With a $50k+ vehicle, are they really going to get Toyota Camry type sales figures?

The uncertain:

  • Tesla has started leasing its capital equipment as a way to reduce the cash burn. Probably a sensible move given their situation, but it is kindof a stealth way of raising capital, and probably with not as good interest rates as a regular bond (who would want Tesla battery pack manufacturing equipment as collateral?).
  • I don’t think Tesla releases how many of its sales are leases, but the number tends to be very high (75%+) for electric vehicles and plug-in hybrids. It would be interesting if someone worked out the short-term/long-term tradeoffs this would bring about. I think (but don’t quote me on this) that auto leases are now accounted for as sales-with-a-right-of-return — i.e., more revenue recognition up front? Also who does the the lease financing? Topics for future research…

Conclusion

  • It seems to me, that based on what we’re seeing now, without the tax credit and taking away the not-having-to-pay-for-cost-of-sales bonus they currently enjoy as part of their GM, they would break even on something like a $40k model 3.
  • Stock valuation implies a potential future of both higher sales and higher margins.
  • With reduced capex, the growth beyond the next quarter is going to stop for the time being. Part of their technology story is their proprietary charger network, and that might fade in relevance, hurting the practicality.
  • But Q3/Q4 will look quite good, with the tax credits still in effect. Doubt this story at your own risk.
  • Also beware of future gasoline cost? (recall toyota Prius sales vs high oil/gas)

Disclaimers

  • I’m an engineer, not a financial analyst. Don’t go gambling based on what you read here.
  • I have no positions, long nor short, in any form, in Tesla, its business partners, suppliers, or competitors. This is an unpaid blog post.

Vaguely related video:

 

 

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