Tesla (NASDAQ:TSLA) caught Wall Street by surprise when it reported a much better-than-expected second-quarter deliveries number. Unfortunately for Tesla bulls, the initial 5% jump in TSLA stock price didn’t last long.
Almost immediately, the deliveries rally was met by selling pressure. TSLA stock is now up just 1.2% over the past week. Despite the strong headline number from Tesla, the fact remains that the company and its stock are facing a difficult outlook for the remainder of 2019. Now that the TSLA stock delivery rally has faded, here’s what matters for the stock in the months ahead.
Prior to the second-quarter deliveries announcement, I predicted expectations for Tesla were so low that the initial market reaction to the number would be positive as long as it was at least in the mid-80,000s. When Tesla announced a record 95,200 deliveries, it was no surprise the share price initially shot up. But reality quickly set in that maybe the number wasn’t as meaningful as it initially seemed.
First of all, the second-quarter deliveries number only exceeded extremely low market expectations. Tesla guided for between 90,000 and 100,000 vehicle deliveries in the quarter. The actual 95,200 number is essentially in-line with guidance. Tesla has consistently struggled hitting targets in the past. Perhaps this initially seemed like more of an accomplishment than it actually was.
Second, Tesla opted not to update its full-year delivery guidance of between 360,000 and 400,000 vehicles. In other words, one of two things must happen for Tesla in the next two quarters. The company must average about 101,000 vehicle deliveries in the next two quarters. Or it will have to cut or miss its guidance.
In the meantime, market expectations for Tesla’s second-quarter earnings report are no longer extremely low. Tesla exceeded market expectations with its vehicle deliveries. If that big number doesn’t translate to much better fundamentals than the company reported in the first quarter, investors will become even more skeptical about the viability of Tesla’s model.
Tesla reported an unadjusted loss of $702.1 million in the first quarter, or roughly -$2.90 in earnings per share. Analysts are now expecting a much smaller EPS loss in the second quarter of -52 cents. They are also expecting $6.39 billion in revenue, representing 59.7% growth from a year ago. Revenue growth has never been Tesla’s problem in the past. However, the earnings number will be critical given margins are the primary concern of many analysts and investors looking forward.
TSLA Stock Risks: Margins and Demand
For years, TSLA stock bears blasted the company for its struggles to ramp production. Now, the focus has shifted from production to demand and margins.
Tesla exceeded Morgan Stanley analyst Adam Jonas’ delivery estimate in the second quarter by 13,622 vehicles. Yet Jonas’ outlook for the remainder of the year is just as cautious.
“At this stage, we have assumed the 2Q beat pulled forward demand from the remainder of the year, leaving our full-year delivery forecast unchanged at 347k units,” Jonas said.
Jonas doesn’t see the second-quarter deliveries number as a beat as much as a shift forward in future deliveries. In fact, Jonas is calling for third-quarter deliveries to drop to just 91,300 vehicles. In addition, Jonas is calling for Tesla’s year-over-year revenue to fall 3% in the third quarter and 2% in the fourth quarter, given weak demand.
Morgan Stanley is also forecasting auto margins of 20.6% in the third quarter and 20.9% in the fourth quarter. That’s a decline from the 23.0% auto gross margins Tesla reported in 2018. It’s also well short of the 25% auto gross margins Tesla CEO Elon Musk once promised.
Wedbush analyst Daniel Ives says Tesla cleared a major hurdle with its second-quarter deliveries. Unfortunately, he says the Tesla story is now all about demand.
“Hitting the 360k-400k unit demand guidance for 2019 is going to be an arduous task in our opinion as ~350k is likely the line in the sand as Street whisper numbers have continued to come down over the past few months.” Ives says.
The Bottom Line on TSLA Stock
Ives sums up Tesla’s difficult situation very succinctly.
“Balancing the ability to hit these goals with a profitable business model remains the crux of the challenges for Tesla as gross margins (driving 20%+ GM key) need to tick up despite selling a markedly lower priced Model 3 vehicle.”
Tesla needs more demand for its vehicles in the second half of the year. To stimulate that demand, it needs its average sales price to fall. At the same time its prices are falling, it needs its margins to rise to become profitable. It doesn’t take a financial genius to see this is a very difficult situation.
I think Tesla and Elon Musk deserve a lot of credit for accomplishing what they have accomplished up to this point. But smart investors should think twice about buying TSLA stock until the company can prove its business model is viable in the long-term.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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