We’re nearing the end of the September quarter. Traditionally, Tesla (NASDAQ:TSLA) reports global unit deliveries within the first five days after the end of the quarter. Moreover, it also breaks down the Model S vs Model X units.
Then, approximately one month thereafter, it provides the exact numbers in the financial results, shortly followed by the 10-Q. The final number tends to be essentially identical to the preliminary one provided earlier.
Here is the main question I’m raising in this article: Do you think that Tesla will change its habit this time, and not provide a full breakdown of its model deliveries, in its preliminary deliveries press release in the first five days of the next quarter?
Specifically, do you think that Tesla might want to hide any potential Model 3 unit delivery shortfall inside a far more impressive total number delivered during the quarter?
I’m working under the assumption that Tesla will meet or exceed its total unit delivery guidance for the quarter. Tesla did not provide a specific number for 3Q, but has said that the second half of 2017 would be at least as good as the first, which was just over 47,000 units. It had guided 1H to 47,000 to 50,000, so it barely scraped by above the low end of the guidance.
One would therefore conclude, knowing nothing else, that Street expectations are for Tesla to deliver at least right around 25,000 cars in 3Q. Perhaps somewhere around 24,000 would be an acceptable number to the Street. I’m assuming that thanks to the recent well-publicized price incentives, it should be a bit over 25,000. Whether that means 26,000 or 27,000 or something not too far from that, is not all that important for the purposes of this article. The point is that the number would be at least 24,000 to 25,000, possibly a little higher.
In other words, we are not talking about a situation in which Tesla would fall short on the overall consensus number for 3Q. Whatever your reasonable definition, it would meet or (modestly) exceed it.
By the way, one year ago, 3Q 2016, Tesla delivered 24,821 cars globally. I assume Tesla will move heaven and Earth to sell cars at any price in order to make sure that the number this quarter will not be lower than it was a year ago. Even if shows only 1% growth — and I imagine Tesla wants to show more than 1% annual growth, given inflation, GDP and global population growth — that pretty much tells you that Tesla will print at least 25,000 this quarter. My guess is somewhere just North of 27,000.
Rather, what I’m getting to is something different. We all know — or at least should know — that Tesla is not valued on Model S and X deliveries. Even if Tesla does print 10% growth — that would be 27,303 units — that is hardly supportive of Tesla’s lofty valuation multiples. 10% unit growth year-over-year is not as fast as some other auto brands such as Jaguar.
No, Tesla’s valuation now is all about the Model 3. Ultimately, it’s about Model 3 profits as the key driver of overall company profitability, but in the short term, it’s about Model 3 deliveries, because that’s all that we’ll get.
Or will we?
In 2016, CEO Elon Musk guided to 100,000 to 200,000 Model 3 units for the second half of 2017. More recently, Musk guided to 30 units for July, 100 for August and 1,500 for September. That’s 1,630 for the third quarter.
Considering that the early Model 3 buyers are mostly Tesla employees or “close friends of the company” who in turn mostly live near the Tesla factory, the time lag between production and delivery should be minimal, arguably closer to minutes than hours. Tesla knows when the car will be ready, and someone should be able to walk over to the other side of the building to hand over the check within minutes.
In any case, whether minutes or hours, it’s not like Tesla has much of a credible excuse to say that a large percentage of the Model 3 cars are in transit and need days or weeks to get to their destination. A few units, for sure — but not the vast majority of them. If the car is ready on September 30, it can be delivered to the employee somewhere else in the building on September 30.
Therefore, while the Street might provide some leeway to Tesla having produced 1,630 Model 3 units in 3Q but only delivered 1,500, it ought not provide leeway to having delivered only 1,000, let alone fewer.
I obviously don’t know how many Model 3 cars Tesla has delivered so far this quarter, and what it will do in the last week. Maybe it will meet or exceed the magical 1,630 number. However, so far I can find no credible evidence anywhere that suggests Tesla has delivered more than approximately 400 cars, at best. If these observations are right, it might suggest that Tesla is now making Model 3 cars at a rate of 15 per day.
And if this is right, we might be looking at September ending with no more than approximately 500 Model 3 cars for the quarter.
Now obviously, these are only my best estimates based on all the various sightings and tea leaves found all over the Internet, forums, VINs, and so forth. I will be wrong, at least to some degree. Perhaps more than I now think.
But let’s say that my estimate is at least somewhat right — 500-ish for the quarter. Under any circumstance, below 1,000. In other words, materially below 1,630. Then what?
My thesis here — indeed my question to you the reader — is whether you think any such shortfall would cause Tesla to abandon breaking down its overall quarterly delivery number, at least for this quarter?
You might understand why Tesla would be tempted to do so: If the overall number is somewhere between “fine” (25,000) and “good” (over 27,500), but the Model 3 number fell short (below 1,630), why not send only the big number to Wall Street, and stay mum on the Model 3 number?
One might envision Tesla saying something like “We delivered 27,303 vehicles in the September quarter, up 10% from a year ago. The Model 3 is ramping through the production verification phases, and we are still fine-tuning the software to ensure that all of our innovative features are flawless when we reach our full production ramp in the coming months. We continue to believe that we will reach at production rate of 5,000 per week some time in December, and 10,000 per week some time in 2018. Therefore, we are on track with our long-term Model 3 goals.”
Translated into non-Tesla speak, that would mean the Model 3 fell short in the September quarter. Why? Because if it didn’t, Tesla would gladly provide the exact Model 3 delivery number.
You might ask: “Let’s say Tesla delivered 500 or 1,000 Model 3 cars in 3Q. In absolute terms, that’s a tiny shortfall compared to 1,630. Therefore, who cares?”
The market may care because of what I said earlier: The market values Tesla mostly on the Model 3, not on a Model S and X business that is barely flat, despite massive well-publicized sales incentives. The valuation of Tesla may not matter much whether the Model S and X are flat, up/down 10% or up/down 20% or even 30%. If all Tesla had were Model S and X, the company would be worth a fraction of where it is today, even at 30% growth.
So therefore, since the company’s valuation is almost all about the Model 3 prospects, even the tiniest divergence from otherwise seemingly meaningless discrepancies between the 1,630 unit Model 3 guidance, and the actual reported number, should be of huge importance to the stock. If Tesla can’t meet guidance for 1,630 cars, how can it be trusted to meet the 5,000 a week or 10,000 a week guidance?
Of course, you can’t have it both ways: It also works the other way around. If Tesla delivers over 1,630 Model 3 units, it would most likely have an outsized positive impact on the stock — and Tesla would surely be making such a larger number the headline of its early October press release. If that’s the case, you had better not be short the stock that day.
To summarize, we therefore have two questions before us:
How many Model 3 cars will Tesla have delivered in the September quarter?
If the number is meaningfully below 1,630, will Tesla not disclose the actual Model 3 number in early October, but rather wait until the earnings release or the 10-Q approximately one month later?
I look forward to your debate on these key factors for the stock.
PS. One more thing, just to be clear and safe…
Let’s not get hung up on how to label the well-publicized pricing incentives on Model S and X inventory cars that have been provided at various points this quarter. It is not really relevant whether we call them “discounts,” “pricing adjustments” or “price discounts” or any other words you choose. It is no more relevant than whether we call it a “car” or a “vehicle.”
The fact that a car may have gone 50 miles, or that it may have been sitting on the lot for over a month or two and is therefore afflicted with some aspect of “technical obsolescence” is but a straw man argument to claim that cars are not being “discounted” (or “price-adjusted” or whatever term you prefer) to the tune of many (tens of) thousands of dollars. The customer is buying the car at a much, much lower price than if he had purchased it at “full MSRP.”
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.