Long TSLA, but bearish next six months

[techmaven]

I'm expecting the X ramp to be slower than most people think. A while back (maybe the Q4 2014 call?) Elon stated the ramp for the X would be considerably faster than the S when discussing the latest X delay. Since then I haven't heard that sentiment again, and any time the launch date is brought up he refers to "first deliveries" and doesn't mention volume production.

No, he keeps saying that the X ramp is going to be significantly faster. But of course, the S ramp was not particularly quick. They shipped 2,438 in Q3, then 5,204 in Q4. I think they are expecting much more than that, but mostly in Q4.

The issue is the start date. If they don't really ramp in Q3 at all, that will be seen as a negative in the short term, even if they do end up catching up to 55k for the year. The big issue is that the market won't believe them and there will be a short term reaction.

 

[neroden]

No, he keeps saying that the X ramp is going to be significantly faster. But of course, the S ramp was not particularly quick. They shipped 2,438 in Q3, then 5,204 in Q4. I think they are expecting much more than that, but mostly in Q4.

Yeah, if they start in September and manage to put out 5000 by the end of the year, it'll be a significantly faster ramp than the model S!

 

[Matias]

What do you think about the fact, that X and S have only 30% common parts?

 

[joefee]

Thoughtful review by ChrisA. Today's action was driven by demand comments on Model S (see the short term TSLA thread) supporting your concerns. I've been trading purely on technicals since the IPO. Way too much emotion on TSLA. My most recent move was to sell when 265 was breached and I'll buy @ at 250 to set up for EC 8/5/15. Good Luck!

 

[ludicrousspeed]

Although I think that some of the points brought up in the initial post are correct and pose some issues than many on this site are not aware of, I still believe that Tesla will break the All Time High then surpass $300 by the end of the year.

When the stock hit $291 last year, the company was in a substantially less attractive position than it is today. Since then, Tesla has introduced the Energy aspect of the business (still underestimated imo), made major strides in improving the model S, increased production ramp and deliveries, drastically expanded the Supercharger network, and even expanded the original Gigafactory plans due to unanticipatedly high demand across the board. I think that at the end of the year we will see a lot of improvements to where the firm stands today. Between now and January, Tesla can release the Model X configurator (which should introduce some of the unknown features they've been keeping secret), make unprecedented software and autopilot updates, officially deliver and ramp up the new Model X (doubling the company's current product line), and meet their 55K delivery goal. The stock is being held down due to increasing skepticism over Tesla's ability to make all of this happen and when they do, the stock will react positively.

I believe the Model X was delayed so much due to the company perfecting the product and as a result, it will be publicly received and admired similar to the release of the S. Tesla's stock is one with major volatility and that reacts heavily to any news about the firm, good or bad. I have confidence that they will meet all major product deadlines and exceed product expectations, which will result in a vast majority of news stories being positive rather than negative for the coming months. Good luck to all investors.

 

[ChrisA]

Robert – I agree that Street analysts are probably anticipating low gross margins on the X for the first 1-2 quarters (though I’m not sure the low initial gross margins on the X are broadly anticipated, per some comments on this thread). But my specific concern is not low initial gross margins on the X alone. Rather, it is the possibility of the X introduction resulting in temporarily softer than anticipated demand for the much more profitable S. It’s the combination of these two dynamics together that could make for an awkward period of transition and a bumpy ride the next six months.

In response to MostlyStock’s comment that the size of TSLA market cap relative to sales is so large as to render margins irrelevant, I disagree. I would say that TSLA as an investment is a unique situation – perhaps the first large cap, publicly traded venture investment (because the revenue opportunity is still orders of magnitude larger than the cap). However, even with venture investing, gross margins matter a lot – a crucial indicator of the future health of an enterprise and the ability raise future rounds of capital. If anything, TSLA will be held to a higher standard on margins because, after all, it is a publicly traded company.

What I’m really interested in is how S demand responds to the roll out of the X. If there is no impact and S demand remains very robust over the course of the next three quarters, my specific concern will prove to be unfounded. However, if S demand misses expectations temporarily, the impact on the stock will be significant -- and it will present a great opportunity to buy more TSLA.

 

[AlMc]

@Chris: Well articulated position. At the last ER, EM indicated that he expects TM to be cash flow positive in Q4. It will be interesting to see if he confirms this on the upcoming ER with some S demand information with the release of the X imminent.

 

[pGo]

Robert – I agree that Street analysts are probably anticipating low gross margins on the X for the first 1-2 quarters (though I’m not sure the low initial gross margins on the X are broadly anticipated, per some comments on this thread). But my specific concern is not low initial gross margins on the X alone. Rather, it is the possibility of the X introduction resulting in temporarily softer than anticipated demand for the much more profitable S. It’s the combination of these two dynamics together that could make for an awkward period of transition and a bumpy ride the next six months.

In response to MostlyStock’s comment that the size of TSLA market cap relative to sales is so large as to render margins irrelevant, I disagree. I would say that TSLA as an investment is a unique situation – perhaps the first large cap, publicly traded venture investment (because the revenue opportunity is still orders of magnitude larger than the cap). However, even with venture investing, gross margins matter a lot – a crucial indicator of the future health of an enterprise and the ability raise future rounds of capital. If anything, TSLA will be held to a higher standard on margins because, after all, it is a publicly traded company.

What I’m really interested in is how S demand responds to the roll out of the X. If there is no impact and S demand remains very robust over the course of the next three quarters, my specific concern will prove to be unfounded. However, if S demand misses expectations temporarily, the impact on the stock will be significant -- and it will present a great opportunity to buy more TSLA.

ChrisA, great points. I would add that if Tesla reaches at 2000/week mark at the end of December as they have said they would, what will they project as 2016 demand? 100k? It may be too early in this earnings call to discuss that but I doubt this number be committed for 2016 projection. I do expect Model X to take away some Model S sales.

 

[Johan]

Most of this bearish view is based around the assumption that the X both initially as well as going forward will have poorer margin than the S. Again I ask where does this notion come from? Elon's incentives package explicitly has a goal of sustained high automotive gross margin over consecutive quarters. The time to achieve that goal is now, BEFORE the launch of Model 3.

I think people here (some) are forgetting that we haven't seen pricing for Model X yet. It will be more expensive than many think. Tesla may be all about accelerating the adoption of electrical transport but they have in no way been shy about the fact that that the path there definitely goes trough a phase with highly priced, huge margin, luxury cars: The Model S and X. Many will be disappointed in how expensive the X will be but that's life, Tesla know that if the X is as great a car as they seem to be confident it is enough people will be lining up to buy it anyway.

Tl;dr: The assumption of lower margins on the X is baseless.

 

[ChrisA]

Most of this bearish view is based around the assumption that the X both initially as well as going forward will have poorer margin than the S. .

Incorrect. I'm assuming lower initial margins on the X -- first 1-2 quarters of the roll-out (for reasons already provided above, see my earlier post and Robert's). I expect the X to be just as profitable as the S long term.

 

[Johan]

Incorrect. I'm assuming lower initial margins on the X -- first 1-2 quarters of the roll-out (for reasons already provided above, see my earlier post and Robert's). I expect the X to be just as profitable as the S long term.

Soo... Let's ballpark this: 3000-5000 Model X at lower margin (10-15%) (but remember the first batches will be heavily optioned with high ASP which usually helps margin a lot) all the while selling 25000-30000 Model S with sustained higher margin (25%) for a total automotive margin of say 22% instead of 25% is going to have a lot of impact??? (With the X winning accolades).

I don't think so...

 

[MostlyStock]

For Q3 and Q4 the Model X will have a much higher Average Selling Price than the current Model S. Even with higher parts costs the Model X is likely to raise gross margins for Q3 and Q4. My gross margin estimates for Q2 and Q3 are below. I expect 2000 Model X sales in Q3 with an average selling price of $115,000. I still view sales as the largest potential problem.

 

[ChrisA]

@Johan I think low 20s is about right on the blended gross margin for Q4 -- if Model S sales don't miss their internal forecasts. But if Model S sales do miss forecast, the blended margin will be worse. Again, the concern is lower initial margins on the X combine with softer than anticipated demand for the S. Today's announcement on the referral program dovetails very well with my concern that the introduction of the X may cause a temporary reduction in demand for the much more profitable S.

So, now the attention turns to how much demand can the referral program generate? (I'm assuming that this is the "secret weapon" that Elon mentioned in the context of ramping up demand if they need to, thoughts?). In general, I think it's a brilliant tactic. The intense enthusiasm of Tesla customers is a huge intangible asset for the company. This is a good time to try to tap that enthusiasm.

 

[AlMc]

@Johan I think low 20s is about right on the blended gross margin for Q4 -- if Model S sales don't miss their internal forecasts. But if Model S sales do miss forecast, the blended margin will be worse. Again, the concern is lower initial margins on the X combine with softer than anticipated demand for the S. Today's announcement on the referral program dovetails very well with my concern that the introduction of the X may cause a temporary reduction in demand for the much more profitable S.

So, now the attention turns to how much demand can the referral program generate? (I'm assuming that this is the "secret weapon" that Elon mentioned in the context of ramping up demand if they need to, thoughts?). In general, I think it's a brilliant tactic. The intense enthusiasm of Tesla customers is a huge intangible asset for the company. This is a good time to try to tap that enthusiasm.

Does our enthusiasm for TM increase because of the $1,000? I believe many of us are doing this without the incentive which makes it looks like TM is forced to pull a demand lever that may not be needed.

 

[Johan]

Do you really think Musk will miss any of his 10 possible incentives?!?

"Musk has the chance to earn options to buy almost 5.3 million shares at $31.17 a piece. These will be handed over in 10 equal installments only after two targets have been reached: first, the market capitalization of Tesla must increase by $4 billion since the previous award; and second, one of 10 other goals must be met. Of these, six are linked to developing prototypes and final versions of Tesla’s planned SUV and smaller, cheaper sedans; one requires the company to produce gross margins of at least 30 percent for four consecutive quarters; and the final three are hit once Tesla sells an aggregate 100,000, 200,000 and 300,000 vehicles."

 

[ChrisA]

which makes it looks like TM is forced to pull a demand lever that may not be needed.

I don't think they would pull this lever without the need for more S demand. As to whether the lever will be effective, you raise a good point that current owners already do a lot to sell cars -- will $1k and/or the possibility of winning a free X really drive the needle? I don't know yet. Curious as to what others think.

 

[ludicrousspeed]

I don't think they would pull this lever without the need for more S demand. As to whether the lever will be effective, you raise a good point that current owners already do a lot to sell cars -- will $1k and/or the possibility of winning a free X really drive the needle? I don't know yet. Curious as to what others think.

That was my initial reaction to the news but after analyzing the decision more I wouldn't jump to the conclusion that they need to up the current model S demand. Keep in mind, this incentive program only runs for about three months so I see it more as a trial period to see its effectiveness and impact on margins rather than something needed to meet yearly goals. Musk has implemented incentive programs with both PayPal and Tesla (Roadster) and both worked out well so he may simply be gaging its effectiveness for the company today. I think if it's proven that Tesla is able to sell more cars and at a lower cost with incentives then the program will become permanent, even if the firm is still supply constrained.

 

[Johan]

I don't think they would pull this lever without the need for more S demand. As to whether the lever will be effective, you raise a good point that current owners already do a lot to sell cars -- will $1k and/or the possibility of winning a free X really drive the needle? I don't know yet. Curious as to what others think.

It's not whether the giver of the link gets something that decides if this drives demand- it's whether a $1000 discount to the potential buyer will increase demand or not.

The cheapest Tesla is $70k, some places $60k after incentives. Another $1000 can push people across a number they've set. And not only those getting inside their number by getting $1000 off but also all those who ups their number when thinking "this is really cool of Tesla to do".

 

[Ocelot]

It's not whether the giver of the link gets something that decides if this drives demand- it's whether a $1000 discount to the potential buyer will increase demand or not.

The cheapest Tesla is $70k, some places $60k after incentives. Another $1000 can push people across a number they've set. And not only those getting inside their number by getting $1000 off but also all those who ups their number when thinking "this is really cool of Tesla to do".

Johan,
I respectfully disagree with you on that one. one-thousand will not push the needle either way. There are few people who say too bad a Model S is 71 000 dollars, guess I will go buy a BMW instead for 70 000. 1-2% off a major purchase like a model S is in my opinion meaningless (with respect to influence on decision to purchase or not). Now if we were talking 1000 dollars off a 25000 car,so 4%, then we are nearly getting somewhere,... maybe? But even then I struggle to see it making a huge difference. People tend to buy what they want in this world of credit. Yes their purchase deciision will be guided by a range of affordability, but ranges are usually much, much wider than 1.5%.

 

[Johan]

Johan,
I respectfully disagree with you on that one. one-thousand will not push the needle either way. There are few people who say too bad a Model S is 71 000 dollars, guess I will go buy a BMW instead for 70 000. 1-2% off a major purchase like a model S is in my opinion meaningless (with respect to influence on decision to purchase or not). Now if we were talking 1000 dollars off a 25000 car,so 4%, then we are nearly getting somewhere,... maybe? But even then I struggle to see it making a huge difference. People tend to buy what they want in this world of credit. Yes their purchase deciision will be guided by a range of affordability, but ranges are usually much, much wider than 1.5%.

I agree with you: I don't think it will work well to increase demand. I also think it tarnishes Tesla to do this "experiment". I was just pointing out that the variable they're experimenting on is whether $1000 lower prices increases demand rather than if existing owners can sell more cars if they get $1000 or the chance to win a free Model X.