Tesla Stock: Is It Invulnerable?

TeslaTSLA 1.9354083096653296%Tesla Inc.U.S.: Nasdaq^USD348.14 6.611.9354083096653296% /Date(1507064400242-0500)/ Volume (Delayed 15m) : 9976191AFTER HOURS^USD351.5 3.360000000000010.965128971103579% Volume (Delayed 15m) : 178905 P/E Ratio N/AMarket Cap 56996914654.9841 Dividend Yield N/ARev. per Employee 566241More quote details and news » (TSLA: Nasdaq)
By KeyBanc Capital Markets ($341.53, Oct. 2, 2017)

Tesla’s third-quarter deliveries were barely ahead of Street expectations, with upside from Model S largely offset by a miss out of Model 3.

Net net, we think a Model 3 miss was somewhat priced in, and Tesla (ticker: TSLA) would likely need to see more substantive near-term production or vehicle-quality issues before the stock would take another leg down.

Third-quarter deliveries come in a bit ahead of Street expectations. Tesla reported 26,150 cars delivered in total (versus FactSet estimate of 25,860) with 14,065 Model S vehicles delivered versus FactSet estimate of 12,860, while Model X came in slightly ahead at 11,865 vehicles versus FactSet estimate of 11,740. The Company produced its first Model 3 cars in the quarter and reached 260, which led to 220 deliveries versus FactSet estimate of 1,260.

Model 3 production bottlenecks are being fixed. Tesla called out supply-chain issues with a handful of suppliers that drove the Model 3 production miss. We think expectations for Model 3 had come in significantly ahead of the report. If and as the company is able to show meaningful improvement in production run-rates prior to the earnings call in early November, we think it would go a long way to more fully restoring faith that the company will achieve something close to the desired 5,000 weekly run-rate expected at some point in the fourth quarter. We don’t expect a 3Q Model 3 delivery number of 220 to cause many longer-term bulls to waver in their thesis that the car can drive several tens of billions of dollars of revenue at double-digit operating and earnings before interest, taxes, depreciation and amortization (Ebitda) margins over the next three to five years.

Yet another data point highlighting softer high-end demand. Model S deliveries are now up 3.6% year-to-date through the third quarter following 2016, when they were up 1% year-over-year. While the company’s implied fourth-quarter delivery guidance was modestly better than its prior guidance (it is now guiding to 100,000 S and X deliveries versus prior commentary that we estimate implied 96,000-98,000), Tesla continued its recently adopted practice of not reporting order growth. Management has repeatedly messaged that order growth is no longer a relevant metric by which this product-based company should be evaluated (though it was up until three quarters ago). S and X represent roughly half the company’s projected profit for the next two to three years (S and X should account for more than half of profits if Model 3 sells anything fewer than 350,000 cars per year), and our surprise at investors’ willingness to reward such growth persists.

Model 3 euphoria is likely to persist, but high-end demand and likely shortfalls in Model 3 profitability remain our concern and primary focus. The driver of the stock has been and will likely continue to be the production of Model 3, and given the inevitable supply constraint (the company made just 260 in a quarter and has 455,000 orders), the stock is difficult to short, in our view, despite what some might find as an obvious attraction if one were to entirely focus on fundamentals and valuation. With that said, there continue to be clear signs that half the profit pool is approaching little to no growth and, ultimately, we think Model 3 profitability expectations appear difficult to top.

-- Brad Erickson
-- Elliot Arnson

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Some of the reports’ issuers have provided, or hope to provide, investment-banking or other services to the companies being analyzed. Share prices at the time the report was issued and the date of the report are in parentheses.

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