Special thanks to Austin Bohlig for his work on this note.
Tonight’s Tesla results once again add further evidence that the shift to EV, autonomy, and renewable energy will take longer than we expect. That said, we believe investors will be rewarded for their patience as Tesla works through the production difficulties of the Model 3. Looking into years 2019 through 2023, we continue to expect a vertical Model 3 production ramp that will shift the company into profitability starting in 3Q20.
The 2nd wave of autonomy will likely be at the end in 2020, and is unchanged from our previous expectation, as Tesla turns on level 5 autonomous driving. The last wave to the Tesla story generally will begin gaining traction in 2020, and continue through 2030 as the company begins to inch towards its mission statement of accelerating the global adoption or renewable energy driven by Tesla solar and storage solutions. Putting it all together we believe the Tesla story represents the biggest opportunity in tech over the next 5 years. (Link to updated model here.)
What Has Changed In Our Thinking?
- “Tesla is in manufacturing hell!” – Due to difficulties ramping production of Model 3, we are lowering our Dec-17 Model 3 deliveries from 5,400 to 2,500. For Mar-18, we are lowering our model 3 deliveries from 35,000 to 10,700. We continue to expect a ramp in Sep-18 and Dec-18 quarter, which results in 190,582 Model 3 deliveries in 2018, which is lower than our previous estimate of 200,660. Our model S and X deliveries remain unchanged, and expect flat year/year growth in 2018.
- Company introduces “scaling back” investment strategy. The bear case on Tesla is still around the belief that the company will not be able to ramp production in a profitable way, and eventually run out of money. Tonight’s results will fuel the bear case given the company, for the first time, introduced a concept that it will be scaling back investment to conserve capital. In the past, the company has not been concerned with the level of investment, so the acknowledgment of more prudent investing will be viewed as a subtle testimony by Tesla that they have a cash-burn problem. Our take is Tesla is taking the right steps to prevent a cash crisis by metering some of its investments.
- Taking a more conservative approach to profitability and gross margin. This may sound like a contradiction. On one hand, we are reiterating our confidence in the Tesla story, but on the other hand pushing back our profitability by two quarters (from Dec-19 to Sep-20). To further complicate our confidence, we are reducing our 2023 gross margin target from 30.5% to 28%. The reason why we can be more conservative on profitability and more positive on Tesla’s story is because our changes to profitability are nulled in the grand scheme of things. Said another way, a 2 qtr push out in profitability along with 200 bps decline in gross margin is immaterial to the story.
- What about Model 3 preorders? The company did not update the number of Model 3 preorders. The last number they gave was August 2nd, 455k pre-orders. Tonight, the company indicated the total value of preorders has increased, implying the number of preorders has also increased. Our best guess is the number of preorders is now closer to 475k. The company indicated they are not giving Model 3 reservations because they view it as “noise.” We believe that this is an important metric, but a vastly more important metric will be the number of Model 3 deliveries a year from now, which we expect to grow exponentially.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.