Bullish expectations for Q3
This article explores the bullish projection that Tesla (NASDAQ:TSLA) is about to become profitable in Q3.
Among the expectations discussed below are that Tesla Model 3 sales in Q2 will be 20,000 cars fewer than production due to federal tax credit rules. This will appear to be poor sales, but in reality will be due to stockpiling cars for sale in Q3 due to the way the tax rules are written.
While this means Q2 revenue will be reduced, it also means Q3 revenue will be increased. As a result, Model 3 should become a top 20 selling vehicle in the US in Q3 with a potential of 80,000 units sold into the US.
This is an average per month sales of about 27,000 Model 3 cars, making it the 12th best selling vehicle in the US ahead of the Nissan Altima (see list below).
Tesla Q3 sales will match the total number of cars sold by Tesla in all of 2017.
Elon Musk has adopted “profits” as his current goal. This replaces his previous goal of fast expansion of the product lineup. The former goal required capital input to fund rapid expansion. The new goal will flip the losses upside down and generate profits now that the bottlenecks are being eliminated one after another.
Most authors write that Tesla is shutting the production line down to “fix problems”. I suggest that Tesla is shutting the production line down to install new machinery that will increase the production speed. Increased production speed means increased gross margin, and if the increase is large enough, net profits.
Showing profits will potentially increase stock price and eliminate the potential for bankruptcy. This in turn will eliminate the bear thesis that Tesla is about to go under and is therefore a good stock to short.
With the short thesis proven wrong, I expect the stock to increase to a new plateau above $400 per share. This was my expectation a year ago, but the bottlenecks delayed the realization until now.
However, sales will likely remain low for May and June. I don’t expect this share price increase to be realized until after a barrage of sales in July make what I’m suggesting here obvious.
Let’s now explore why I’ve come to the above conclusions.
Model 3 may enter top 20 selling US cars in Q3
This week, Tesla has reached 500 cars per day, or, 3,500 cars per week. Bloomberg just increased their production estimate to 3,523/wk.
According to Electrek, Tesla is well on its way to reaching 5,000 cars per week by the start of Q3 in July.
If Tesla reaches this target for next quarter, the Model 3 will enter the top 20 list of US vehicles sold. A rate of 5,000 cars per week means an annual rate of 250,000 cars and a monthly rate around 20,000 cars. I expect Tesla will sell 80,000 Model 3 cars in Q3 so look for 27,000 or so cars per month on the list below.
That rate is between the Jeep Grand Cherokee and the Toyota Tacoma. If realized, the Model 3 will become a top 20 selling car in the US, next quarter.
This data was published by Focus2move here:
Today, the Model 3 is the best selling EV, but it isn’t on the top 100 list. Neither is any other EV. Every one of the top 100 selling cars in the US have an internal combustion engine. And while Tesla is now projected to be building more than 3,000 cars per week, which is to say over 12,000 cars per month (which would place the Model 3 around the #40 position of vehicles sold in the US), I expect this will not happen in May or June.
The reason? The federal tax credit.
It is beneficial for any company to cross the 200,000th car sold into the US threshold, early in a new quarter. Doing so wins that company an extra quarter of sales where customers receive the full tax credit.
Tesla would likely cross that mark this quarter if it sold all the cars it builds, as soon as they are built. To avoid this, Tesla is likely already stockpiling vehicles for a blow out delivery rush starting in July.
Several authors have noticed that the production figures are higher than reported sales figures. Tesla should have built over 6,500 cars in April, but sold fewer than 4,000. That’s a 2,500 or so discrepancy.
There are articles projecting that the discrepancy results from poor build quality and cars piling up for re-work and being stored in parking lots until Tesla can get around to fixing them.
I contend that thesis is wrong, and instead, Tesla is piling up a tsunami of cars for sale in Q3. Here’s why.
How the Federal Tax Credit works
The federal tax credit phases out over a 4-quarter (1-year) period beginning the second quarter after a company sells their 200,000th car.
If Tesla actually sold the cars produced, I expect the company would cross the threshold this quarter. By delaying the 200,000th US sale until after July 1, Tesla adds nearly an entire extra quarter of sales to the program, benefiting their customers. Tesla will sell nearly 60,000 more cars under full tax credit.
For this reason, I think one should expect sales to be flat this month and next (in Q2), while a 20,000 car stockpile ready for Q3 sales is accumulated.
Musk’s Increased Confidence
Elon Musk has stated several times that Tesla will not need to raise money this year. During the recent earnings call, he explicitly stated Tesla will not raise money this year.
Much was written about Musk’s behavior on that call. Most articles in one fashion or another, assert that Musk is cracking under the pressure. If so, Tesla may be headed for a crash near term.
So many people bought into that notion that 400,000 new shares sold short overnight after the earnings call. The stock price dropped 10% in one day.
Since then, however, the stock price has fully recovered and the divide between the bullish and bearish theses has widened.
Listening to the call, it made perfect sense to me that Elon was annoyed by the callers who had read the release and yet asked questions about things specifically stated in that paper. It was as if the callers were saying they knew the paper said they would be profitable, but they don’t believe it and so are trying to figure out what Elon is lying about. Feeling like he was being called a liar, I believe, is why he lost his cool.
But that isn’t what’s interesting. What’s interesting is that he is so confident that he will not need to raise funds that he didn’t bite his tongue.
What this means is that for the first time, Musk is placing profits ahead of expansion and rapid growth. And what’s more, he fully expects to reach profitability.
Bloomberg’s Model 3 Tracker diverging from reality
Bloomberg’s Model 3 Tracker website has been excellent at following the ramp up in Model 3, until April. The analysis has a flaw that doesn’t account for the federal tax credit deviation from business as usual.
The Tracker assumes that when a car is built and ready for sale, that Tesla will sell it as quickly as possible. This has been true, until this past month. Now, and until the end of June, Tesla can benefit its customers best by holding back about 20,000 (total) cars built in Q2 and then selling them in Q3.
Here’s the VIN data from the wild, plotted as yellow dots. Notice the gap in the numbers from about 23,000 to 25,500 representing about 2,500 cars that are absent from the public. Where did they go? Were they built?
Tesla should have built around 6,500 Model 3 cars in April. This is based on Tesla statements that they built 2,000+ cars per week for 3 weeks in a row (2 in April), and then shut down the line to add improvements and further speed the line production. April production should have been ~6,500 cars.
Instead of 6,500 Model 3 cars sold in April, Tesla only sold 3,875 M3 cars according to InsideEVs here.
We know Tesla built over 4,000 Model 3 cars in the first 2 weeks of April and would have needed to shut the line down for the rest of the month if cars produced were the same as cars sold. That makes no sense.
One logical explanation is that Tesla “sold” fewer cars than it “produced” by around 2,500. If these cars are being stockpiled, then in May and June this discrepancy should get much worse.
Tesla should build around 10,000 Model 3 cars in May and around 18,000 cars in June. But Tesla will likely sell just 5,000 per month for those two months to remain below 200,000 cars sold into the US. That means Tesla may accumulate 2,500 + 5,000 + 13,000 = 20,500 cars more than it sells in Q2.
Bloomberg’s model averages the estimates of cars produced with cars sold. But that’s averaging apples and oranges, it doesn’t work.
Last week the production estimate was 1,752 and this week it is 3,523.
Bloomberg needs to separate the sales and production projections into two different values. Otherwise they are trying to average apples and oranges. This would be fine any other time except now, where unusual strategy makes sense to benefit customers who desire to receive the federal tax credit.
Potential Q3 Sales
This brings us to estimate potential Q3 sales based on these optimistic expectations.
First, if Tesla succeeds at ramping to 5k/wk by the beginning of Q3, then it should have produced about 30,000 M3 cars in May and June. If it sells 10k of those to hold #1 BEV position for those months, there would remain 20,000 cars in stock.
Second, Tesla should pass 5k/wk build rate and increase to higher than that during the middle of Q3. That means Tesla should build more than 60,000 cars in Q3. VIN filings must significantly increase to meet that pace, and those filings will be public information.
For the past month, VIN filings are about 3,800 cars per week. This is well on its way to 5,000 per week by the end of the quarter. Tesla should also build about 25,000 of Models S and X in Q3.
Tesla will be coming out with the dual motor and possibly also ludicrous mode variants of the Model 3 in Q3. Tesla is taking orders for the higher cost variants of Model 3 first, so I expect the average price to remain high and will use $50k for these estimates.
The total M3 cars sold in Q2 should be around (20k + 60k) * $50k = $4B.
The total MS and MX sold should be around 25k * $100k = $2.5B.
The total revenue from cars should be in the range of $6.5B with a gross profit of $1.3B if they make the 20% margin figure claimed. I’ll ignore the energy side for this treatise as small by comparison.
Given that Musk has firmly asserted the company will not need cash, and also that it will be profitable and cash flow positive, I suspect that Musk is thinking Tesla will manage something like the above.
Model 3 is about to enter the US Top 20 list
The Model 3 is about to climb the ranks of other vehicles, and if the above figures are met, it will pass Toyota Corolla and Honda Accord, landing in a tie with the Jeep Grand Cherokee for top selling vehicles in the US for Q3.
I admit that this comparison is, and isn’t, fair. The Model 3 is an EV whereas all of the top 100 cars sold in the US today have internal combustion engines, ICE.
The Model 3 is the best selling EV and the only mass produced EV. In this regard, the comparison is NOT fair since it is different from all of the rest of the cars on that top 100 list.
However, any other car company could have launched an EV instead of their ICE models. And, they could have built their own equivalent of the Supercharger Network instead of relying on other businesses to do so for them. So in this regard, the comparison IS fair and demonstrates that people want electric cars with good range and a fast charging system that is already deployed.
That this is so is confirmed by a recent Consumer Reports article about a AAA survey showing that 20% of Americans expect their next vehicle purchase to be an EV. US car sales dropped by 2% in 2017 according to JDPowers. That marked the end of a 7-year run of steady sales growth. Given the AAA survey of intentions combined with blooming sales of Model 3, I expect we will see US sales of internal combustion engine cars drop by a larger figure in 2018.
There are not enough good EVs to replace the drop in ICE vehicle sales.
Jaguar I-Pace, for example, claims 350kW charging capability. But the claim is a farce. Today, no 350kW chargers exist out on the open road and it will likely be several years (if ever) before a network of charging stations is built. It isn’t clear yet that the 350kW charging standard will even work.
Upon introduction this summer, anyone that purchases an I-Pace will be forced to use the only chargers actually deployed… the same ones used by the Bolt and Leaf that only charge at 50kW instead of Tesla’s 120kW. Charging an I-Pace will take more than double the time to charge a Tesla.
What this means is that counter to claims that Tesla is about to face a swarm of new contenders, the fact is that none of them can hold a candle to the charging speed of the Supercharger Network. Ironically, all of the contenders should increase Tesla sales, as once anyone reviews charging infrastructure, Tesla is the only logical brand choice.
Introduction of the competition should further increase Model 3 sales until such time as a new charging infrastructure is actually in place, and, assuming Tesla is unable to use that new infrastructure. If Tesla CAN use that new infrastructure, then Tesla remains the best EV choice bar none, simply for its enhanced number of charging stations.
Tesla is building more cars than it is selling. This may indicate that Tesla is accumulating cars to be sold in Q3 due to tax phase out rules.
If Tesla makes the production targets it has disclosed, it would generate approximately $6.5B in Q3 gross sales with around $1.3B in gross margin. Even without cutting back on spending, that much extra gross margin should yield net profits.
The Model 3 may rise from below rank #100 for sales into the US now, to above position #20 next quarter. That is, the Model 3 appears poised to jump 80 positions in the US top 100 vehicle sales list, beginning in July.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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