Tesla Q2 Deliveries Top Reduced Estimates But Still Down Y/Y
Tesla Q2 Deliveries Top Reduced Estimates But Still Down Y/Y
Tesla's Q2 deliveries topped reduced ests but still down y/y; more trouble for flagship Model 3; indicated Q2 revenue & "profit" bolstered, again, by financial "enhancements" and more
Tesla Motors (TSLA US) reported today that second-quarter deliveries were 90,650. That was better versus greatly reduced market consensus for 83,000 and my 84,000 estimate (see Tesla CEO Diverts Q1 Call With WTF Rant, 4/30/20), forecasts lowered to adjust for disruptions caused by the deadly Covid-19 pandemic.
Still, results were down 5% versus last year as demand remained notably weak. It's not clear how much was virus-related disruption since most of Tesla's sales probably were generated late in the quarter, as it is typical, when business conditions also were rebounding. Plus the quarter should have been an easy beat with substantial market expansion, a new plant, and a new model versus last year.
Sales may not have been production constrained as has been speculated by bulls since Tesla ended the quarter with several weeks of available inventory even with production sharply lower as its factories remained closed for much of the quarter.
The Numbers, Up Close
Tesla had projected 2020 deliveries up by a whopping 40% to 500,000, guidance it still hasn't officially withdrawn. In the second quarter last year Model 3 sales were just ramping up in Europe and China after a bungled Q1 launch ( Tesla Q2 Deliveries Beat; Demand and Profit Trends Less Clear, 7/7/19), the Shanghai plant was still mostly a muddy field, and Model Y was still a promised concept.
However, Tesla's outlook seemed ambitious even before the pandemic hit, and even more so now that it implies more than 320,000 deliveries for the second half. Not likely.
Recall, I had warned about signs of trouble even before a deadly virus hit, which I had projected would be masked by incremental volumes from overseas and Model Y. Sales for Models S&X have been in deep decline for two years now, affirming that these models have been solidly displaced, and I have long reported that US Model 3 sales have been fading since early 2019. Two years of significant price reductions haven't been enough to stabilize demand.
While the quarter started off under pressure with most markets still under partial if not total lockdown in April, those restrictions were relaxed throughout May and largely eliminated by June 1st. Since Tesla generally produces most of its sales in the last month of its quarter, Indications are its reopened factories were able to produce all the cars it needed to meet strained demand.
That was certainly true for struggling Models S & X. Production plunged 56% versus last year to just 6,326, still leaving 9.9 weeks of excess inventory available as deliveries dropped another 40% to 10,600 even after multiple rounds of sizable price cuts since last year.
Models 3 & Y generated more than 88% of total deliveries versus 81% last year—and still ended the quarter with nearly 3 weeks of available inventory even with production down 1%. I'm guessing all those excess cars were Model 3s.
Another big clue of troubling sales trends is that Tesla again refused to break out Model 3 and Model Y sales, so I'll do it:
Models 3 & Y were 80,050, up 5% versus the troubled first quarter and up 3% versus last year—when Model Y didn't exist since it was launched in the first quarter of this year.
That's important because I long have projected that Model Y would likely displace Model 3 sales.
Let's say Model Y contributed 10-20% of M3+Y deliveries this quarter, or 8,000-16,000—probably an overly conservative estimate.
If so Model 3 sales were down 7-17% versus last year, and I assume the higher end of the range.
That's not all. I estimate that sales outside the US now contribute the majority of total deliveries, perhaps as high as 60% this quarter. This implies 32,000 Models 3+Y delivered in the US, down 29% versus 45,225 US Model 3 deliveries last year.
If so US Model 3 deliveries potentially fell 65%—no wonder Tesla doesn't want to break this out.
Challenged Ahead
This seems to confirm my concern that Tesla really has only one broadly competitive model left in its lineup for the foreseeable future as Model 3 settles into borrowed time. As soon as Model Y is introduced overseas I expect this same pattern to be repeated.
As I have observed since last year, there's just not enough difference between Model 3 and Model Y to support sustainably strong demand for both. Model Y is a crossover, it's a little bigger than Model 3 with similar performance and range, and the price difference on comparable models has already shrunk (as I projected) from $4,000 to just $2,000 (see Clearing Up Tesla Q419 Results, 1/30/20).
So Tesla really has a very simple sales strategy: sell as many Model 3s as it can overseas while it gets Model Y ramped up in all markets. It's not a perfect strategy since Model Y predictably has most if not all the quality and reliability problems from Model 3 plus a few new ones of its own. Not to mention formidable competition from more than a dozen promising new EV models coming over the next year, or that business conditions could remain pressured for months to years after the pandemic subsides.
Cue accelerated launch later this year of CyberTruck with typical Tesla fanfare, likely followed by disappointing market presence and staying power after the hype fizzles.
But that will be next year's problem, along with lapping incremental sales growth this year.
In the meantime
Tesla is expected to report second-quarter results in about three weeks. True to form, CEO Elon Musk sent his late-quarter motivational email to employees last week saying "breaking even is looking super tight."
We'll see. Tesla might need as much as $500 million in accounting boosts, nonoperating, & unusual items to get close to breakeven—even larger than usual juicing versus the company's typical financial "enhancements" which happen every single quarter.
That's because even though deliveries were slightly higher versus reduced estimates, they were down versus last year when average pricing and revenue mix also were significantly higher. Costs were likely more contained versus the chaotic results last year, but probably still outpaced revenue.
So my estimates are little changed with reported revenue at $6.03 billion (down 6%), EBITDA at $840 million (14% margin), and a net loss near $40 million versus the $408 million loss last year.
Tesla still hasn't earned an unvarnished profit from operations in any quarter of its 17-year history. So of course its stock spiked to another all-time high on Thursday at $1208 per share, pegging Tesla's equity as the most expensive of any automaker in the world at more than $200 billion. Tesla's enterprise value is now an astonishing 56x my 2020 EBITDA estimate.
Tesla bonds are only slightly less overvalued at 102 (4.6% ytw; 430 bps), up 6 points since April. This meager yield is 210 bps tighter versus the BoA High Yield general index, even though Tesla is a Caa1/B- issuer. This leaves no margin for disappointing performance, much less Tesla's considerably overstated revenue and EBITDA, or complications that may show up in the 10-Q which likely will provide critical information, as is typical, that tends to confirm that operating performance and financial condition are weaker than earlier reports indicated. This has happened every quarter for several years now. Maintain "Underperform."
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