Tesla Reports Solid Beat With Strong Q121 Deliveries, But...
Aggressive price cuts boosted late quarter sales—likely at the expense of already strained profitability.
Tesla (TSLA) reported on Friday that it hit 184,800 deliveries in the first quarter, up 109% versus last year. That was an impressive beat versus market consensus for 162,000 and my own estimate for 154,000 (see Tesla: Don't Drive Angry on 2/8/21).
The company reported a 140% increase in sales of Models 3 & Y versus last year to 182,780, only slightly more versus total production of 180,338 which was up 76%.
In addition to improving global business conditions overall, Tesla benefited as I expected from the incremental contribution of its continued ramp-up of Model Y, freshly launched in March 2020, and Made-In-China (MIC) Model 3 which was just getting off the ground this time last year. Sales of both likely offset weaker same-store Model 3 sales in the US and potentially in Europe.
Tesla didn’t produce any Models S & X, where it still probably had excess inventory even as sales dropped 83% to just 2,020. Tesla is busy “refreshing” both aging models with long overdue overhauls that the company said have been “exceptionally well received" with “new equipment installed and tested in Q1” and “in the early stages of ramping production.”
We’ll see. Early reports reveal dubious gimmicks in the model refresh like a potentially dangerous yoke steering wheel, letting the car “guess” at gear shifting and direction using Tesla’s problematic Autopilot sensors, and moving key driver controls into Tesla’s touchscreen which recently was recalled for going blank while driving, among other issues.
I am skeptical such stunts will meaningfully revive interest for Models S & X in the coveted luxury market niche versus such formidable and clearly superior competition as, for example, the gorgeous Lucid Air Dream Edition which, like the sumptuous Porsche Taycan, sold out even before the first car made it to the showroom.
If so, this will be more bad news for Tesla just as it faces its biggest sales pressure in what may prove to be its most competitively challenging year so far.
The stalling flagship Model 3 already has been losing ground versus intense and accelerating competition in the US, China, and Europe—the largest world markets, as I have tracked more than two years—from multiple rival models by major global players as well as its flawed and similarly challenged Model Y (as I recently discussed in Tesla: Don’t Drive Angry on 2/8/21 and What’s Going On With Tesla’s Demand? on 10/27/20).
Tesla Has Been Wearing Out Its Welcome
Serious competition is not Tesla’s only trouble which, as I have projected, will become more troublesome later this year as peak incremental sales in Model Y and MIC Model 3 pass their first anniversary.
As I noted before, Tesla’s biggest problems tend to be self-inflicted. This includes notoriously poor quality and reliability which persistently plague all its models and which also make its cars more expensive to insure and repair. Add to that Tesla’s dismal customer service in all its key markets which also drives prospective buyers elsewhere.
It doesn’t help when Tesla’s buyers learn that it significantly inflates its range estimates, eroding that supposed competitive edge even as peer range averages have been rising. Edmunds recently reported that “every Tesla we've tested has failed to hit its EPA range estimate.” This, as I noted before, confirmed similar reports in previous years.
Tesla also has been losing its legendary technology leadership, real and presumed (see Tesla: The Sky's The Limit...Until on 1/28/21). Tesla’s failures in promises and/or execution are being convincingly challenged by more credible rivals like Volkswagen, Ford (F), and General Motors (GM), among others.
Tesla’s particular problems also mean benefits that boost EV industry sales like global economic improvement as the Covid-19 pandemic recedes plus buyer incentives spurred by increased government support for EVs, as we saw in China in late October, help its competitors at least as much if not more.
Price Cuts and Hope Fade As Effective Strategies
What’s left to do? Slash prices. As I said last month:
Tesla’s additional price cuts just over a week ago on top of aggressive rounds in January imply February trends may be little improved, as I projected (see Tesla: Don’t Drive Angry on 2/8/21). Tesla even introduced—a quickly withdrew—a sub-$40,000 Standard Range Model Y, just like it did last year with its suddenly offered and quickly aborted $35,000 Model 3, affirming again how quickly margins hit the skids on lower-end models.
Tesla Is Falling And It Can’t Get Up, 2/27/21
This seems to have fueled the late quarter surge in deliveries Tesla needed. However, the cost of weakened revenue from aggressive price cuts on top of multiple rounds over the past year will further pressure already strained profitability. Tesla has yet to generate unvarnished profits on any of its core operations in its 18-year history.
As a result, I estimate first quarter revenue only modestly higher versus my previous estimate at $10-10.5 billion (up 67-76%), with reported EBITDA at $1.79 billion (16.9% margin) and $200 million in reported net income (2% margin)—all boosted by roughly $400 million in energy credit sales and other unusual/nonoperating items. If so, these results then would be lower versus the fourth quarter despite higher deliveries.
I expect similar results in the second quarter and then a still slower than expected increase in the second half of the year. That’s when I expect stiff global competition will draw blood just as Tesla’s incremental contribution advantage fades as its sales lap last year’s results.
So, for now I’ll stick with my estimate for 767,800 deliveries (up 54%) for the year, which indicates 2021 revenue at $43.2 billion (up 37%), reported EBITDA at $7.55 billion (a lower 17.5% margin) and leverage on GAAP EBITDA still uncomfortably high at near 5x.
Tesla's 5.3% senior notes due 2025 are little changed since my last report at 104 (2% ytw; 160 bps), offering no credible upside versus potentially significant downside. The bonds remain excessively valued with yield tighter by 135 bps versus the BoA High Yield general index even though Tesla is a weak B3/BB- issuer. Pricing also indicates a meager 82 bps per turn of leverage on my estimated 2021 reported EBITDA and an appallingly low 36 bps per turn of leverage on core operating—unvarnished—EBITDA. Maintain "Underperform."
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