MorningWord 7/5/16: $TSLA – Out for Delivery

by Dan July 5, 2016 9:40 am • Commentary

In a bad news dump over the holiday weekend, Tesla announced Q2 car deliveries that came in below their prior guidance. But, there are a couple of big buts. From the press release:

With continued productivity improvements, Tesla expects output to reach 2,200 vehicles per week in Q3 and 2,400 vehicles per week in Q4. Current order rate trends and backlog support production at those levels. In total, Tesla expects to produce and deliver about 50,000 vehicles during the second half of 2016, approximately equal to all of 2015.

The second half delivery guidance is nearly equal to the company’s entire 2015 deliveries of 50,580. But I think it is safe to say at this point that TSLA’s guidance as it relates to quantities and timing of deliveries has become a bit of a joke among auto and investor circles. The stock is only down 3% as I write, barely a selling panic.

Today the WSJ attempted to explain Tesla’s recent problems. His answer is that CEO Elon Musk is: Pushing Boundaries Too Far.  The author Christopher Mimms discusses TSLA’s recent acquisition offer for SolarCity (the money losing solar panel financing company. TSLA CEO Musk is Chairman and the largest shareholder  of SCTY, his cousin is the co-founder & CEO). Mimms also reflects on the recent death of a Model S driver on their relatively new AutoPilot offering.  Despite the stock being down about 20% from its 2016 highs, down about 25% from its all time highs made in 2014, it still sports a market cap of about $31 billion.  To put that in some context, TSLA’s market cap is nearly 70% of General Motors, a company that sold nearly 10 million cars globally in 2015, is expected to have $155 billion in sales in 2016, $5.50 in eps, has a dividend yield of 5%, and trades at 5x expected earnings.

You’ve heard this all before. And maybe the comparison to an auto-company is so 2013, but I’ll make the case. This is not to chastise Elon Musk and his vision for his company, the future, and humanity. It’s a noble cause. So I place the responsibility of this investment anomaly on the backs of investors. They know Musk pushes boundaries, which is likely in large part why the company’s loss of $6.93 a share in 2015 on $5.3 billion in sales (50,580 cars) doesn’t bother them. So for the true believers, have at it. But be able to stomach massive stock swings.

The news of Q2 deliveries over the weekend should not come as a surprise. The news that Musk wants to vertically integrate his vision for a world without fossil fuels should also not come as a surprise. The one wild card that the whole story hinges on is his ability to continue to push the boundaries on design, technology, price and volume.  A failure of too many of these in the next couple years means a massive breakdown for TSLA. Let’s say more Autopilot accidents leads to a shut down of that offering (the company states clearly that it is in Beta), consumers are lukewarm about the latest design of the Model X (it is horrid by most accounts) or they are unable to deliver on the mass market Model 3 both on price and volume.

Any hints of that sort of news flow will continue to chip away at what remains unusually positive sentiment for shares of TSLA.  As for the stock chart, there are a couple ways to look at its performance since the start of 2014, either a long and volatile consolidation that will make for an epic breakout as the company begins to deliver on mass production of mass market vehicles and broader geographic distribution of their Models S & X.  Or a series of lower highs and lower lows that will ultimately give way to a meaningful re-rating of the stock as it becomes devoid of headlines in the lead up to the Model 3 expected release in 2018:

TSLA 5 year chart from Bloomberg
TSLA 5 year chart from Bloomberg

Disclosure: We are negatively positioned in TSLA near term via put calendar that will capture its Q2 results expected in early August, read here.