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Tesla: These Numbers Aren’t Good

Shares of Tesla (TSLA) were up nearly four percent in early Monday trading after CEO Elon Musk visited China for the official groundbreaking of the company's next Gigafactory. While bulls see this as an important step in the right direction for the company's future, it likely is just another diversion to shift the narrative away from some questionable ongoing numbers.

First of all, let's circle back to last week's Q4 delivery and production announcement. One thing that may have been lost in the shuffle was the Model S/X situation. The company reported a year-over-year decline for its two luxury models, despite the significant tailwind from tax breaks winding down in the US and the Netherlands. In fact, if we believe the estimates from InsideEVs for the US, it means that the rest of the world was down well over 3,000 units for Q4 2018 over Q4 2017.

Unfortunately, the situation may be even worse than that. The Netherlands was up more than 2,000 units in Q4 over the prior-year period, meaning the rest of the world likely lost over 5,000 units. While we can assume the China trade situation really hurt that country's sales, take a look at what Tesla Motors Club is reporting for other European countries. With nearly a half dozen estimates in so far, most of these countries are down anywhere from 35% to 60%.

In fact, Norway would have been even worse if not for a fleet sale of roughly 280 vehicles confirmed this week by Electrek. While Tesla management tried to claim it was production constrained in 2018 for the Model S/X, demand was not as high as stated, resulting in sales to rental car companies. Things have not gotten off to a good start in 2019 either, with Norway sales down more than 61% through the first six days of the year, as seen below.

Now I'm sure Tesla bulls will come back and say it's all about the Model 3. Okay, but what happens if Tesla falls, say 6,000 units, sequentially from Q4 2018 to Q1 2019, basically to what it did for the Model S/X last year? That would mean a sequential drop in gross profit of perhaps $150 million or more. There's also the headwind of the reduced US and Netherlands tax credits, forcing Tesla to cut prices across the board in some places.

Now the next bull point will focus on the Model 3 going into production for European and Chinese countries. An increase in those sales means that Tesla's US Model 3 sales fall, meaning a dramatic drop in the potential amount of high-margin credit sales possible. In fact, despite Tesla registering almost 15,000 new VINs so far in 2019, the 90-day rolling increase has basically flatlined over the past couple of months as seen below.

That gets me to the news of the day, which happens to be Elon Musk's visit to China to promote the Gigafactory groundbreaking. We still don't have any progress on the trade war front, so anyone expecting Tesla to reap any rewards in the country anytime soon will be disappointed. Just look at what has happened to Apple (AAPL) in China recently, with a major revenue warning coming last week as Chinese consumers have pulled back on purchasing US goods. Remember, Tesla's Q3 2018 10-Q filing showed revenues in China of $409 million, down from $564 million a year earlier, and that was really before the trade war really started to heat up.

Of course, the two most important questions are timing and funding. Tesla has said it will use local debt to finance this project, but how much will the bill be in the long term? Management has guided for flat to only slightly higher capex this year and next, despite having numerous projects supposedly in the works. Also, what about Tesla's timeline for partial production this year, as we know the company's guidance usually can be questioned. Let me remind you of Tesla's roadmap for the standard battery version of the Model 3:

  • August 2017: Standard battery version starting at $35,000 should be available in November 2017.
  • July 2018: Standard battery available in 6-9 months.
  • October 2018: Standard battery available in 4-6 months.
  • January 2019: Standard battery available in 4-6 months.

Unfortunately for consumers, there's no guarantee at this point it will ever come. Not only has the US tax credit been halved already, but it gets halved again in July 2019 if the standard battery isn't available then. Plus, since the original November 2017 time frame, US interest rates have soared, meaning auto loan rates are higher, making it more expensive to borrow to finance a purchase. Gas prices also have dropped, meaning savings on that front are lower. It would not surprise me if we see another price cut for the Model 3 in the US over the next quarter or two.

Of course, what will the standard battery version be to get that price down to that $35,000 price point? Well, the glass roof could be gone, the leather interior may not be available, etc. If you are expecting a really great vehicle, then you likely will be a bit disappointed. The standard battery Model 3 seems eerily familiar to the solar roof, whose plans can be seen below. Yes, we are in 2019 now but Tesla is still planning to ramp last year.

So while shares of Tesla are up a bit on Monday, just know that things aren't exactly firing on all cylinders. As more and more European numbers come in for Q4 2018, we can see how bad things are there, with Norway not getting any better so far in January. Also, Model 3 VINs have basically flatlined, and more deliveries outside the US mean credit sales for Tesla will drop. Finally, the China Gigafactory story may be grabbing the headlines, but Tesla has shown plenty of delays before and Tesla's plan for paying for it is by begging Chinese customers to buy the Model 3 today. If that doesn't spell trouble, I'm not sure what really will.

Author’s additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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