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Tesla - Production and deliveries miss, margins under scrutiny

Nicholas Hyett | 4 April 2019 | A A A
Tesla - Production and deliveries miss, margins under scrutiny

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Total vehicle production during the first quarter was 77,100, with deliveries lower at 63,000. Around 10,600 vehicles remained in transit following the launch of Model 3 deliveries to Europe and China.

Both production and deliveries were substantially below the level achieved in the final quarter of 2018, and Model S and X deliveries were particularly hard hit, falling by more than half.

Tesla shares were down 6.1% in pre-market 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 counts. In turn, that's given the group a market value of $50bn, some 38% larger than Ford, despite producing around 17 times fewer cars last year.

That premium is all the more daunting when you consider that, until now, Tesla has never delivered sustainable profits. An improved fourth quarter saw results come in ahead of even Tesla's lofty expectations, but that hasn't put all the market's worries to bed.

A series of price cuts has sparked fears that demand may be flagging, and a dramatic slowdown in higher end vehicle deliveries will have done nothing to ease those fears.

The group's achieved its goal of selling Model 3s for $35,000 dollars, but what that's done to margins remains to be seen. Moreover, if lower priced Model 3s cannibalise more premium Model S and X sales then the group needs to dramatically increase production to offset the lost margin - Model 3 production in Q1 barely improved on Q4.

Meanwhile the 10,000+ cars in limbo on their way to international customers will have dramatically increased the demands on Tesla's cash pile, tying up millions of dollars in inventory. The need to protect margins and preserve cash may explain Tesla's decision to axe sales outlets earlier in the year - a decision that was quickly reversed with little official explanation, but may be related to the cash costs of breaking lease agreements.

Elon Musk remains locked in battle with the SEC over potential contempt of court allegations. The conflict relates to tweets about Tesla's production and deliveries this year - where official guidance remains unchanged.

Q1's production numbers have raised more questions than they've answered for us. The change in sales mix and price cuts have the potential to seriously dent margins, and we suspect the group's cash burn in the quarter was high as well. We won't know for sure until first quarter earnings are announced though.

Tesla remains one of the most absorbing companies we cover, and one which for good or ill, never ceases to surprise.

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First Quarter Production Report

Lower than expected delivery volumes and price cuts are set to negatively impact first quarter net income, although management reassured that the group finished the quarter with 'sufficient cash on hand'.

In North America, the Model 3 was again the highest selling mid-sized premium sedan, and inventory in the US remains exceptionally low - just 2 weeks compared to an industry average of 2-3 months.

Guidance for 2019 remains unchanged at 360,000-400,000 vehicles.

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