With his street low TSLA price target of $93/share, Vertical Group’s Gordon Johnson has rightfully earned himself the nickname of most bearish Tesla analyst on Wall Street, and according to some, Johnson was instrumental in facilitating today’s bizarre $30 intraday swing in TSLA’s stock price from a 6% spike at the open on the “surprise” news the company had “hit” its 5000 Model 3 quota, to a confounding 3% drop shortly after noon.
Speaking on Bloomberg TV, Johnson expressed numerous concerns about the company, mostly about its continued cash burn: “If they run out of cash, the stock will fall quickly. We think that is around the corner.” But more apropos to today’s Q2 delivery release, Johnson questioned whether some cars that left the factory were counted as produced but still needed further work prior to consumer delivery, the so-called “factory gated”, whose interpretation has prompted a mini scandal within the Teslarati on twitter.
Following his interview, and right around the time we learned that Tesla’s chief engineer Doug Field was not coming back from his “family time sabbatical”, Johnson sent out a note to clients in which he explained that while much had been made of TSLA hitting the all-important milestone of 5,000 Model 3 cars produced in the last week of June, he found 6 key aspects of TSLA’s numbers concerning.
Here are his concerns:
1. Using FactSet numbers, Consensus was calling for 2Q18 TSLA Model 3 sales of 27.980K units, and total sales of 51.120K units; TSLA reported Model 3 sales of 18.440 units (a 34% shortfall) and total sales of 40.740 units (a 20% shortfall); stated differently, this represents Model 3 demand of just 1.418K cars/week in 2Q18; consequently, as we’ve stressed, as TSLA runs through its backlog of Model 3 reservations, we believe the company will become demand constrained rather than supply constrained (we expect this to occur at some point in 4Q18/1Q19 – see attached spreadsheet); stated differently, despite all the focus on Model 3 cars produced/week by the media today, we stress to our readers that just because TSLA makes a Model 3 car – with competition coming and buyers tired of “waiting” – does not mean demand for that car exists.
2. TSLA mentioned that it reached 5,031 Model 3 cars of “factory gated” production in the last week of June; while the company said it has used the “factory gated” terminology all along, we were not able to find this term in any SEC filings or public transcripts; however, looking to Linkedin, it seems “factory gated” may mean cars that require further testing and quality inspection upon leaving the factory floor (Exhibit 1) – this would mean these cars are likely not “full production vehicles” in the traditional sense of auto industry terminology;
Exhibit 1: Linkedin Review Suggests “Factory Gated” Produced Cars
May Require Further Inspection/Testing
3. Excluding the 5,031 cars TSLA produced in the last week of June (i.e., before its “boost week” – link), the weekly output rate of Model 3 cars over the first 84 days of 2Q18, based on TSLA’s reported numbers (link), was 1,962/week – i.e., (28,578 – 5,031 = 23,547; 23,547 ÷ 84 = 280.32; 280.32 × 7 = 1,962 Model 3 cars/week of production); surprisingly, 1,962 Model 3 cars produced/week in the first 84 days of 2Q18 is ACTUALLY below the 2,000 Model 3/week production rate TSLA highlighted in its 1Q18 production report published 4/3/18 for the first week of 2Q18 (yes, you heard that right) – link; furthermore, in yet another massive miss to intra-quarter guidance provided by Elon Musk via Twitter (for which it seems there is no penalty for being wrong), the avg. rate of 1,962 Model 3 cars produced/week leading up to the last week of June 2018 is also materially below the 3,000-to-4,000 Model 3 cars/week of production Elon Musk noted TSLA would achieve in May following a brief shutdown in April (link);
4. TSLA’s net reservations were listed at 420K cars as of today (7/2/18), while they were listed at 455K 8/17 (link), and “above 450K” 5/18 (link); additionally, to date, TSLA has delivered 28.386K Model 3 cars; thus, as we warned last week, and as TSLA management told us, new orders have essentially been 0 for ~1 year now (i.e., no new reservations) – due, according to TSLA, to long lead-times to get the car; as such, when considering net reservations have been flat at ~455K cars since 8/2/17, as well as TSLA’s comment to us last week that new orders for Model 3 cars have been nonexistent for roughly a year, we believe today’s data confirms lackluster new reservation demand for Model 3 cars for some time now;
5. When subtracting total Model 3 cars delivered (i.e., 28.386K) from total Model 3 cars produced (i.e., 41.029K) one arrives at 12.643K Model 3 cars “in transit”; be that as it may, when comparing this number to TSLA’s reported Model 3 cars in transit as of 2Q18 of 11.166K, it seems there are ~1,477 excess Model 3 cars unaccounted for (Exhibit 2); while Elon Musk has said the numbers can be off by 0.5%, this is a 13% gap; while we cannot say with certainty what these “unaccounted” cars represent, it seems to reason that they are comprised of production cars requiring re-works sent to delivery centers (which could also suggest Model 3 cars produced/week may be a bit overstated); and
Exhibit 2: Excess Cars Suggest Demand May be a
Problem (with 420K in Net Reservations, how are
So many cars in Unaccounted for)
Source: Company filings, Vertical Group.
6. Based on our analysis, there were roughly 175 less Model S/X vehicles in transit at the end of 2Q18 vs. 1Q18 (link), but >9K more Model 3s were in transit, meaning just under $500mn in extra finished goods inventory (i.e., cash burn) – assuming a Model 3 ASP of ~$55K/car and Model S/X ASP of ~$105K/car; while this will be partially offset by TSLA’s offer to configure to all of its Model 3 ~420K net reservation holders last week – at $2.5K in additional configuration costs, assuming every one configured (which is highly unlikely, as we believe the bulk of Model 3 reservation holders are buyers seeking the $35K/car option), this would be $1.05bn in additional cash inflows – we still expect TSLA to display another sizeable cash burn in 2Q18 (when factoring in EBIT losses ~$600mn/qtr, as well as ~$150mn in interest expense and $450mn in depreciation).
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Johnson’s conclusion:
We expect TSLA’s 2Q18 earnings report to be a downside catalysts for the shares. We would be adding to short positions today with TSLA’s 2Q18 production report now out of the way. We maintain our SELL rating and $93/share year-end 2019 price target.
To this we’ll just add one more thing: traditionally Tesla stock price has been unabashedly forgiving of any bad news. today however, for the first time TSLA stock dropped on what was supposed to be good news. If this is the start of a trend in which shareholders demand more than just eloquent promises and verbal glitter, Elon Musk may have a huge problem on his hands.
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