Tesla Inc (NASDAQ:TSLA) Earnings Model
Author: Michael Lachnicht, Published: October 22, 2019 8:20pm Category: Earnings Preview (Prior to the 3Q2019 earnings release)
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Summary of Model and Earnings Preview: As Tesla focuses more on the production and marketing of Model 3 to foreign customers, primarily in China with the expected launch of Gigafactory Shanghai in 2019 Q4, an annualized production goal “in excess of 500,000 Model 3 vehicles” has been set between 2019 Q4 & 2020 Q2. Tesla believes that the Tesla Factory, which currently has a capacity of 7,000 and will undergo further efficiency-related improvements, and Gigafactory Shanghai, which is expected to launch in 2019 Q4 and will be aided by learned experience regarding operational efficiency after issues experienced in other Gigafactories, will be able to achieve an annualized production of 500,000 Model 3s, or roughly 10,000 weekly.
The establishment of Gigafactory Shanghai is expected to be met by a large market for premium vehicles in China. This market may be further expanded by reducing the ASP for Model 3 vehicles by offering a basic version of it for $35,000, thereby appealing to a broader range of customers with different price ranges. The decrease in price would be offset by significantly higher deliveries of Model 3 vehicles and lower production costs resulting from higher efficiency and local deliveries instead of international shipping. I predict that Model 3 deliveries will increase with the introduction of Gigafactory Shanghai, but I will take a conservative approach and estimate that 9,000 Model 3 units will be in production weekly by the end of 2020 Q2. The reason for this is that Tesla has been overly ambitious in their goals in the past and has come up short, albeit slightly. Also, with the threat of U.S./China tariffs and a global recession in 2020, I believe this model should be cautious until more information is available regarding the global economy. This is not to say that Tesla will not produce 10,000 units per week on a sustainable basis, but I do not believe that they will do it by 2020 Q2, which is the upper limit of their time prediction. I currently have an annualized output for 500,000 Model 3s as early as 2020 Q4.
The emphasis being placed on Model 3 has placed Model S and Model X on the backburner. I expect the production of these more expensive vehicles to stay either stable or decrease slightly over the next year and for delivery percentages to stay at or close to 100% since Tesla is keeping low reserves of them. However, if history repeats itself, there could be a pull-forward of orders for Model S & X (and Model 3) in 2019 Q4 since the Federal EV tax credit for buyers will be fully eliminated as of the beginning of 2020. Interested buyers may buy these vehicles ahead of the tax credit’s expiration. This would result in slightly higher 2019 Q4 deliveries and slightly lower 2020 Q1 deliveries. Since Tesla is currently focusing on clearing their inventory and increasing their working capital by selling Model X and S and deliveries have been over 100% for the 2019 Q2 and Q3, I expect for these models to continue to be made as needed.
The expected average selling price per vehicle is down for a number of reasons including the downward price adjustment of Model X/S, the higher percentage of total vehicles sold being Model 3s (which had an ASP of $50,000 in 2019 Q2), the eventual introduction of Model Y (also less expensive), and a reduction in the volume of Model X/S sold. If Tesla focuses on selling the $35,000 basic Model 3, then ASP will further fall, but sales revenue should be helped by the likely increase in sales resulting from the lower price option. Ultimately, I expect for the ASP to drop materially starting 2020 Q1 once the Model 3 production and delivery further overshadow those of Model X/S.
Revenue for the sale of Model S & X was down due to downward price adjustments. Tesla deemed that lowering the cost of the Model X and S made it more likely for eligible vehicles to be returned due to a larger economic incentive, so auto sales ”revenue [was] decreased $564.6 million to offset potential returns by adding the difference to the sales return reserve” (2019 Q2 10-Q). It should be noted that this began at the start of 2019 and was not retroactively applied to prior years. In addition, an amount of $1.40 billion of auto sales revenue was recognized, primarily due to a new revenue recognition policy beginning in at the start of 2018, and leasing revenue was decreased by roughly $830 million due to the same policy. This policy was also not applied retroactively applied to years financial data before 2018. It is important to note this so as to not confuse these changes as indicative of a broader trend.
I expect the auto sales gross margin to increase starting with the launch of Gigafactory Shanghai, the launch of the Model Y, and overall improvements in efficiency in all factories. As previously stated, as the ASP per vehicle goes down, the increases in efficiency and volume of deliveries should drive revenue and more than offset the reductions in revenue per vehicle. This efficiency should also increase production in Gigafactory 1, which should increase energy storage segment revenue over time.
Overall, I would rate Tesla Motors as a buy because of its long-term prospects, namely the launch of Gigafactory Shanghai and its broad appeal to the Chinese market. While I do not expect the goal of a 10,000 weekly Model 3 production at or before the end of 2020 Q2, I do expect for an annualized rate of 500,000+ Model 3 production to be achieved as soon as 2020 Q4. While potentially delayed in its manifestation on the income statement and balance sheet, I predict the benefits of decreased shipping costs and input costs will play a much more significant role in driving a higher overall gross margin YoY than the annual consensus gives them credit for.
Contrary to the quarterly consensus for 2019 Q4, I expect a positive EPS, and contrary to the annual consensus, I think 2020 will be a record-breaking and highly profitable year for Tesla, despite it probably not reaching its Model 3 production goal by the time it currently aspires. In the long-term, if Tesla successfully grasps the Chinese marketplace as it intends to in Shanghai, the concurrent reduction in input costs and increase in production should position Tesla favorably in meeting the demand of the Chinese population, resulting in a higher deliverables, thereby driving revenues to record highs on a QoQ basis.
The establishment of Gigafactory Shanghai is expected to be met by a large market for premium vehicles in China. This market may be further expanded by reducing the ASP for Model 3 vehicles by offering a basic version of it for $35,000, thereby appealing to a broader range of customers with different price ranges. The decrease in price would be offset by significantly higher deliveries of Model 3 vehicles and lower production costs resulting from higher efficiency and local deliveries instead of international shipping. I predict that Model 3 deliveries will increase with the introduction of Gigafactory Shanghai, but I will take a conservative approach and estimate that 9,000 Model 3 units will be in production weekly by the end of 2020 Q2. The reason for this is that Tesla has been overly ambitious in their goals in the past and has come up short, albeit slightly. Also, with the threat of U.S./China tariffs and a global recession in 2020, I believe this model should be cautious until more information is available regarding the global economy. This is not to say that Tesla will not produce 10,000 units per week on a sustainable basis, but I do not believe that they will do it by 2020 Q2, which is the upper limit of their time prediction. I currently have an annualized output for 500,000 Model 3s as early as 2020 Q4.
The emphasis being placed on Model 3 has placed Model S and Model X on the backburner. I expect the production of these more expensive vehicles to stay either stable or decrease slightly over the next year and for delivery percentages to stay at or close to 100% since Tesla is keeping low reserves of them. However, if history repeats itself, there could be a pull-forward of orders for Model S & X (and Model 3) in 2019 Q4 since the Federal EV tax credit for buyers will be fully eliminated as of the beginning of 2020. Interested buyers may buy these vehicles ahead of the tax credit’s expiration. This would result in slightly higher 2019 Q4 deliveries and slightly lower 2020 Q1 deliveries. Since Tesla is currently focusing on clearing their inventory and increasing their working capital by selling Model X and S and deliveries have been over 100% for the 2019 Q2 and Q3, I expect for these models to continue to be made as needed.
The expected average selling price per vehicle is down for a number of reasons including the downward price adjustment of Model X/S, the higher percentage of total vehicles sold being Model 3s (which had an ASP of $50,000 in 2019 Q2), the eventual introduction of Model Y (also less expensive), and a reduction in the volume of Model X/S sold. If Tesla focuses on selling the $35,000 basic Model 3, then ASP will further fall, but sales revenue should be helped by the likely increase in sales resulting from the lower price option. Ultimately, I expect for the ASP to drop materially starting 2020 Q1 once the Model 3 production and delivery further overshadow those of Model X/S.
Revenue for the sale of Model S & X was down due to downward price adjustments. Tesla deemed that lowering the cost of the Model X and S made it more likely for eligible vehicles to be returned due to a larger economic incentive, so auto sales ”revenue [was] decreased $564.6 million to offset potential returns by adding the difference to the sales return reserve” (2019 Q2 10-Q). It should be noted that this began at the start of 2019 and was not retroactively applied to prior years. In addition, an amount of $1.40 billion of auto sales revenue was recognized, primarily due to a new revenue recognition policy beginning in at the start of 2018, and leasing revenue was decreased by roughly $830 million due to the same policy. This policy was also not applied retroactively applied to years financial data before 2018. It is important to note this so as to not confuse these changes as indicative of a broader trend.
I expect the auto sales gross margin to increase starting with the launch of Gigafactory Shanghai, the launch of the Model Y, and overall improvements in efficiency in all factories. As previously stated, as the ASP per vehicle goes down, the increases in efficiency and volume of deliveries should drive revenue and more than offset the reductions in revenue per vehicle. This efficiency should also increase production in Gigafactory 1, which should increase energy storage segment revenue over time.
Overall, I would rate Tesla Motors as a buy because of its long-term prospects, namely the launch of Gigafactory Shanghai and its broad appeal to the Chinese market. While I do not expect the goal of a 10,000 weekly Model 3 production at or before the end of 2020 Q2, I do expect for an annualized rate of 500,000+ Model 3 production to be achieved as soon as 2020 Q4. While potentially delayed in its manifestation on the income statement and balance sheet, I predict the benefits of decreased shipping costs and input costs will play a much more significant role in driving a higher overall gross margin YoY than the annual consensus gives them credit for.
Contrary to the quarterly consensus for 2019 Q4, I expect a positive EPS, and contrary to the annual consensus, I think 2020 will be a record-breaking and highly profitable year for Tesla, despite it probably not reaching its Model 3 production goal by the time it currently aspires. In the long-term, if Tesla successfully grasps the Chinese marketplace as it intends to in Shanghai, the concurrent reduction in input costs and increase in production should position Tesla favorably in meeting the demand of the Chinese population, resulting in a higher deliverables, thereby driving revenues to record highs on a QoQ basis.
Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.