On April 3, Tesla Inc. (TSLA, Financial) reported its vehicle delivery numbers for the first quarter of 2019, missing the (already much reduced) Wall Street analyst consensus by 13%. Unsurprisingly, the market was not enthused by the news, with shares tumbling more than 8% on April 4. Valued at close to $50 billion, Tesla has a huge amount of growth priced into its stock. Hence, a 31% sequential decline in deliveries from the previous quarter has caused bullish investors to fret.
A number of investment banks have published research notes in reaction to Tesla’s latest deliveries report. While the bullish analysts have largely tried to put a brave face on the disappointing numbers, the mounting signs of problems ahead could not be ignored. Two of the most bullish shops, Oppenheimer and Wedbush, tried to downplay these issues in their updates, yet neither was able to completely ignore them. Indeed, they highlight problems that could well sink the electric vehicle company in the months ahead.
Oppenheimer fears peaking demand for premium models
Oppenheimer’s latest note attempts to strike a confident tone, arguing that demand for Tesla’s Model 3 sedan remains strong, contending that “sell-in to new geographies looks still to be in early stages." Unfortunately, hopes for improvements to international sales were not enough to distract Oppenheimer from the clear fall-off in demand for the higher-end Model S and Model X:
"TSLA deliveries disappointed as the company indicated significant volumes were in transit to China and the EU. Of note, Model S/X deliveries fell far short of expectations, which we believe will add fuel to bear arguments about peak demand for those vehicles."
The Model S and X are Tesla’s highest margin products by far. The steep decline in demand for them across all geographies is a serious problem. Oppenheimer is troubled by the clear drop in demand for these products, and rightly so. However, the investment bank’s confidence in a future turnaround looks rather suspect at this stage. The Model S and X have been the most important contributors to Tesla’s gross margin. The collapse in demand for these high-end products bodes ill for the company’s profits going forward, not simply in this quarter alone.
Wedbush fears depleting cash reserves
Wedbush’s latest update on Tesla struck a similar tone to that of Oppenheimer, i.e. troubled by the first quarter but bullish about the future. Still, the softer-than-expected quarter has given the bullish bank pause:
"While we and many on the Street were expecting a soft quarter and believe profitability will return to Tesla starting in the 2H with 2Q profitability at this point still a wild card depending on the demand/ cost cutting trajectory at the company, last night's news puts another near-term overhang over the name.”
Model 3 sales fell more than 60% sequentially in the U.S. International demand does not look likely to be able to pick up the slack. Indeed, it seems as if Wedbush’s analysis is based more on wishful thinking than serious financial modeling. Even so, it was not able to ignore the mounting worries about Tesla’s cash position:
“We also believe the chances of a capital raise in the $2 billion/$3 billion arena now go from 30%-35% odds to 50%-55% given the current cash situation and lower profitability trajectory going forward."
Tesla has faced cash crunches before. While the second half of 2018 saw it pad out its cash balance a bit, that trend has clearly reversed in the first quarter of 2019. Tesla’s inventory has expanded even as it has cut prices across all its models. Indeed, it is sitting on close to $2 billion in additional inventory since the end of 2018. A serious cash crunch appears imminent, even excluding the significant debt the company has to pay down this year and the promised rollout of new products like the Model Y compact SUV.
Verdict
The Tesla growth story ended on April 4. The company is trying to portray the first quarter as a temporary blip, but all empirical evidence suggests otherwise. Tesla pulled every lever to juice up demand in the last months of 2018. It has no more to pull, other than further margin-crushing price cuts.
Tesla’s best quarters appear to be behind it, with demand stagnation in action and a return to losses imminent. Yet, Oppenheimer and Wedbush remain committed to their bullish outlooks, with price targets of $437 and $365, respectively.
Investors would be best served to look at the deteriorating growth story playing out in real time, rather than get suckered into another iteration of Tesla’s infinite growth narrative. This time, Tesla will not be able to use the allure of a bright future to distract from a disastrous present.
Disclosure: Author is short Tesla via long-dated put options.
