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Tesla - Deliveries miss, and prices cut as subsidy stops

Nicholas Hyett | 2 January 2019 | A A A
Tesla - Deliveries miss, and prices cut as subsidy stops

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Tesla Inc USD0.001

Sell: 709.42 | Buy: 709.97 | Change -0.39 (-0.05%)
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Tesla's fourth quarter trading update showed production rising 8% on the previous quarter, itself a record high, to 86,555 vehicles. However, deliveries of 90,700 were behind analyst estimates.

Alongside production and delivery numbers, Tesla announced that it was cutting the price of its US Model S, Model X and Model 3 by $2,000. That aims to partially offset a fall in the federal Electric Vehicle tax credit, from $7,500 to $3,750.

The shares were down 9.5% in early trading.

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Our view

Elon Musk's Tesla has a fantastic brand and, by all accounts, a fantastic product as well.

Its early push into high performance, high quality electric cars has upended the rules in the automotive industry, where traditionally scale is what really counts. In turn that's given the group a market value of $57.2bn, some 88% larger than Ford.

Tesla's rate of production has increased rapidly over the last year, to over 86,000 vehicles in Q4. On an annual basis that's 350,000 cars a year, to Ford's 6.6m in 2017. Analytically, market value per car doesn't tell us much, but it does give an idea of the valuation gap - Tesla is on around $163,000 to Ford's $4,600.

That valuation is all the more impressive when you consider that, until now, Tesla has never delivered sustainable profits, and a year ago was burning through nearly a billion dollars of investors' money a quarter.

A steadily increasing market share in the US means the brand seems to be delivering results. But the challenge for Musk in the second half of 2018 was to prove Tesla could survive without a financial lifeline from its investors. In other words that it could be profitable and cash positive.

The company met the challenge and then some in Q4, with margin improvements coming in ahead of even Tesla's lofty expectations. That put it firmly in the black and delivering formidable cash flows.

But for all the good news, Tesla's current size still doesn't come close to justifying its current market cap. The share price rests on massive growth over the years to come.

That sort of growth doesn't come cheap. And while Tesla has a great brand, we worry it doesn't have a distribution network, fuelling infrastructure or sufficient manufacturing facilities to grow at the pace its lofty valuation requires. Added to that is a nagging worry that we may be approaching the end of an economic cycle, not an ideal time to be selling premium cars.

Q4 deliveries, while still impressive, were a little behind expectations. Having to offset the end of electric vehicle tax credits in the US won't be doing margins any favours either,

The company has repeatedly insisted that cash generation will improve such that Tesla won't need to raise new capital from shareholders or borrowers. But it's hard to see how they can avoid it.

Elon Musk has been able to overcome similar hurdles in the past, and has assured investors he will do so again. But as the hurdles get bigger, and the demands on management get higher, Tesla's reliance on its founder could become more of a curse than a blessing.

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Q4 Trading Update

Tesla's total production is broadly in line with guidance, and includes 61,394 Model 3s and 25,161 Model S and X vehicles.

Deliveries grew to 90,700 vehicles, 8% ahead of Q3, and included 63,150 Model 3s. That's made the Model 3 the bestselling premium vehicle in the US across the whole of 2018, but is still less than analysts had hoped for.

Model 3 deliveries were limited to mid and higher-priced versions for North American customers. However, the company plans to extend Model 3 sales to international markets in 2019, with lower priced variants and leasing also in the pipeline. A right-hand drive model is due to hit the roads before the end of the year.

Find out more about Tesla shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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