Earnings Preview: Tesla Likely To Miss Full Year Targets

Tesla Motors (NYSE:TSLA) is scheduled to announce financial results for the third quarter of fiscal 2015 on November 3rd. ^[1] The Silicon Valley based auto maker delivered 11,580 Model S vehicle in the third quarter, after having delivered 10,045  and 11,532 vehicles in the first and second quarters, respectively. ^[2] These figures take up Tesla’s full year delivery total to 33,157. The company is targeting 55,000 sales for the full year.

Considering its current rate of delivery, the company is on course to deliver just over 44,000 vehicles for the full year, but it also released the Model X SUV late in the third quarter, which should help the company come close to its full year target. ^[3]  The company has previously mentioned that it has already booked over 20,000 pre-orders for the Model X, but it seems as if it will not be until the back half of 2016 that the company is able to fulfill those orders. So, it looks likely the company will most likely miss its full year targets. Below, we take a look at the financial implications of these figures, as well as outline the factors that we will be watching out for in the earnings call.

We have a price estimate of $170 for Tesla, which is about 20% below the current market price.

Production Rate

According to a Green Car report, Tesla is unlikely to be able to produce the Model X at any kind of volume for a while yet due to issues with suppliers. ^[4] The report says that the company is still negotiating with suppliers of important parts like high strength aluminum and brake lines. Until the company has those components, it cannot go ahead with production. It will take still more time to implement the proper tooling and testing procedures before production can be ramped up to achieve the proper scale. According to the report, production might be delayed till late December or early January. We will be watching out for more information on this front in the earnings call.

Model S Production Rate

According to our estimates, Tesla has consistently only delivered just 80% of the cars it produces in any quarter. This means that of the 12,807 vehicles produced in the second quarter, around 3,000 cars were probably delivered in the third quarter. We expect production in the fourth quarter to be around the same levels as it was in the third quarter, as factory shutdowns during the holidays are likely to offset the improvements in production rate.

The company has been trying to reduce the lag time between production and deliveries. This is important as customers, especially in China, have expressed concerns over the large gap between time of order and time of delivery in the past. Most of the of orders from China for vehicles made in September and October 2013 were not fulfilled immediately as the company opened sales in the region last year in April and that has affected sales in the region somewhat. In the first quarter this year, Tesla also changed in its distribution process as it switched from trucks to rail as the preferred mode of transporting its vehicles for delivery in some parts of North America.

Margins

Tesla offers buyers the option to customize their Model S vehicles. Depending on the features customers demand, average vehicle price can range from $70,000 to $125,000. Tesla also offers a leasing option through an arrangement with U.S. Bank. Depending on the mix of the average selling price of vehicles, as well as the financing channel through which they are sold (direct or leased), the company’s gross margins can vary significantly. In the previous quarter, Tesla guided for a lower gross margin. Company management said that the vehicle mix was shifting more towards lower margin models, S70 and 70D, with lower contribution from the P85D and P90D models. However, the realization of economies of scale in production should mean that the cost of producing each unit comes down, which in turn should offset the impact of mix on the gross margin. Additionally, operating expenses are expected to rise on a sequential basis by around 10%. This should put pressure on the company’s bottom line.

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1. Tesla Motors Investor Relations [↩]
2. Tesla delivered 11,580 Model S EVs in Q3, AutoBlog, October 2015 [↩]
3. Tesla’s Model X Is Here, and It’s as Awesome as We Hoped, Wired, September 2015 [↩]
4. Tesla Delivery Goal Fell Due To Slower Model X Production Ramp: Sources, Green Car Reports, August 2015 [↩]