Can Tesla deliver?
The next catalyst for the electric-car pioneer will be its second-quarter vehicle-deliveries report this week. Even a strong number won’t put concerns about demand for its cars to rest though.
After a brutal start to the year, Tesla’s share price has rebounded about 25% from the recent lows set in June. The electric car maker’s bond prices also have recovered significantly since then. Optimism surrounding second-quarter vehicle deliveries seems to have played a role. Chief Executive Officer Elon Musk has been hinting at an impressive number, perhaps with some caveats.
“I want to be clear that there is not a demand problem,” Mr. Musk said at a shareholder meeting on June 11. Then Mr. Musk said in a June 25 email to employees, “We are on track to set an all-time record, but it will be very close.“ Analyst consensus calls for 91,000 deliveries, according to FactSet. That would narrowly top the record set in the fourth quarter of 2018.
Investors would be wise to sit out any celebration.
For starters, record deliveries would hardly guarantee a profit. Tesla managed a net profit margin of less than 2% in the fourth quarter of 2018. While the company isn’t likely to publish full quarterly financial results for several weeks, there is reason to believe margins have shrunk since then.
“We believe that Tesla has an incentive…to ’move the metal;’ in other words, prioritize deliveries over margins and pricing, which it appears to have done this quarter,” wrote Barclays analysts in a note to clients last week.
A less favorable sales mix is one reason: In the fourth quarter last year, roughly 30% of total deliveries were higher-end Model S and Model X cars, which carry much higher profit margins than its mass-market Model 3. But new competition in that segment from Jaguar and Audi, particularly in Europe, could sting. This time, analysts expect higher-end cars to make up less than 20% of Tesla’s unit sales.
Analyst consensus calls for Tesla to lose 56 cents a share on an adjusted basis in the quarter, according to FactSet. At the start of 2019, that consensus called for a profit of $1.91 a share.
Maintaining momentum in terms of unit sales alone will be a challenge even if the second quarter turns out well. Tesla will need to increase its sales pace to meet its full-year guidance of 360,000 to 400,000 cars.
That won’t be easy. Many enthusiasts who wanted a Model 3 have already been able to buy one. U.S. federal tax credits, which were halved at the start of the year for Tesla buyers, will be reduced again on July 1 in the U.S. New buyers will be entitled to a rebate of just $1,875, compared with $7,500 last year.
And while the stock is no longer in orbit, it is hardly a bargain. Tesla’s shares trade at about 40 times the 2020 earnings estimate of $5.58, according to FactSet. That is very high for a car company. Even that profit figure looks fluid if past patterns hold. Analysts had penciled in a 2020 profit of $11.58 a share when this year began.
If demand for Tesla’s cars doesn’t hold up, demand for Tesla shares probably won’t either.
Write to Charley Grant at charles.grant@wsj.com
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