This Elon Musk comment will scare Tesla Investors – The Motley Fool
Last week, Tesla (NASDAQ: TSLA) reported wrong results for the first quarter of 2019. The electric car pioneer had warned of threatening problems earlier this month, but investors were still taken off guard by the extent of the losses. Tesla's net loss of $ 4.10 per share – or $ 2.90 per share, excluding equity-based compensation costs – was worse than even the most bearish analysts estimate. On average, analysts expected a loss of just $ 0.69 per share.
Not surprisingly, Tesla's terrible result initially did nothing to curb the enthusiasm of CEO Elon Musk. In fact, Musk predicted that Tesla will return to solid profitability in the second half of 201[ads1]9 and will provide positive free cash flow from the beginning of this quarter.
However, a comment Musk made under Tesla's earnings call should make investors extremely skeptical of these pink predictions. Let's take a look.
Tesla has a demand problem
A sharp sequential decline in vehicle deliveries was the main reason for Tesla's first quarter earnings wipeout. Tesla delivered about 63,000 cars last year, with 31% from Q4 2018. Model S and Model X achieved particularly poor, with 12,100 deliveries overall, down more than 50% compared to the company's typical interest rates for 2017 and 2018.
Part of the decline was driven by a planned increase in the number of vehicles in transit to customers outside the US. Logistics problems also pushed some deliveries into the second quarter. That said, weak demand was the primary cause of the large decline in Model S and Model X deliveries.
Model 3 demand has also cooled significantly. Many investors had anticipated the introduction of the $ 35,000 standard model 3 to create a great demand for demand that would take months to fill. Price increases for higher end variants should have added to that demand.
Instead, Tesla currently promises deliveries within two weeks for all versions of Model 3 at most, if not all, US. It's a big change a few years ago, when Elon Musk claimed that the reserve list for Model 3 grew steadily, even though Tesla was the "anti-sell" car, with no advertising, no discounts and no test drives available. 19659005] Musk expects a quick recovery in orders
Tesla's projections that free cash flow and earnings return to positive territory are soon dependent on a recovery in deliveries. The company's official year-round guidance requires 360,000 to 400,000 deliveries, including 90,000 to 100,000 in the second quarter. At the center of these areas, Tesla had to deliver an average of 111,000 cars per quarter in the second half of 2019, 76% before the delivery frequency in Q1.
However, it becomes clear that the ordering activity will have to accelerate dramatically in order to support that growth level. During the Q1 earnings call, Musk said: "With the recently announced product enhancements on Model S and X, as well as a continued expansion of Model 3 globally, we expect the ordering rate to increase significantly throughout the year … relative to our production levels." The point later in the conversation in response to an analyst's question, noting that "people just don't like to buy cars in the winter."
It is true that car sales tend to be seasonally weak in January and February. However, the introduction of $ 35,000 model 3 and price cuts for the rest of the Tesla portfolio would have increased demand. In addition, March and April tend to be stronger months, so Tesla's ordering activity should already have recovered to the level that is sustainable.
Musk's comments on the earnings call show that he expects order activity to continue to accelerate through 2019. It should be very worrying for investors because it means that Tesla's forecast for the rest of the year is probably based on unrealistic assumptions.
Regarding Tesla, skepticism pays
Experience shows that Musk's apparent confidence that demand will accelerate through 2019 does not mean much. For example, Musk said on Tesla's first quarter that he was "optimistic about being profitable in Q1 and for all quarters ahead." Instead, Tesla lost more than $ 700 million last year and expects to report another loss in Q2.
In fact, there are good reasons to doubt that demand will recover, especially in the United States, which has historically accounted for the majority of Tesla sales. First, Tesla has already exhausted the pool of pent-up domestic Model 3 demand. Second, the federal electric vehicle tax credit for the Tesla purchases will fall by 50% ($ 1,875) on July 1, and increase the effective price of a Tesla in the second half of 2019. Thirdly, many potential buyers can choose to wait for the Model Y crossover that was unveiled last month. Crossovers are far more popular than sedans today.
Musk is trying ever more incredible tricks to pump up the demand for Tesla vehicles, such as his latest claim that Tesla owners will be able to make up to $ 30,000 annually by leasing their vehicles through a robotic taxi network as soon as next year. (Most experts agree that a broad deployment of robotics will take years or even decades to achieve.) It may persuade some consumers to buy a Tesla, but it's not likely to be a long-term gambler.
To be sure, there are many interesting projects along the way at Tesla. But if history is a guide, they can all take longer than expected to perform. In retrospect, the demand for Tesla's existing vehicles is cooling, which can lead to a large shortage of deliveries in 2019 and 2020. It can further stress Tesla's weak balance and drive the share price even lower.