Tesla: Short Term vs. Long Term

People tend to overestimate what happens in short-term, and underestimate what happens in the long-term. We believe that notion will define the Tesla story over the next six years. We caution that it will take time for the Tesla story to unfold, and that there will be disappointments along the way, but Tesla’s Jun-17 quarter results and outlook around production and demand suggest the company is on a track to be a significant beneficiary in the global paradigm shift to EV and autonomy, all while producing affordable vehicles. Traditional auto is in a tight spot, dogged by legacy engineering (both on vehicles and manufacturing), and high labor costs. Tesla’s biggest challenge is ramping production, and, to a lesser extent, the threat of other tech companies (WayMo, Baidu, Apple).

Key Takeaways From The Quarter. Tesla maintained its outlook around key expectations including Model 3 production ramp, cap ex spend and profitability. The company also achieved slightly higher gross margins in Jun-17 than expected. In addition, there was commentary that in the past 5 days, they have not seen cannibalization of Models S and Model X from Model 3.  Instead, there has been an increase in both Model S and Model X orders, plus an uptick in Model 3 reservations to an average of 1,800 per day. Tesla clarified that there are 455k net reservations for Model 3, and that the “greater than 500k” reservations comment Musk made last Friday was 518k gross reservations.

3 Additional Gigafactories Are Coming. On the call, Musk mentioned that there are plans for Gigafactories 3, 4 and 5. One of these will likely be in the US, one in Europe, and one in China. We believe it will take 3-6 years to build these additional factories. This is significant for Tesla, as other automakers need to build factories at a similar scale and have yet to even break ground on their version of a Gigafactory. This underscores the structural lead Tesla is slowly building over traditional auto manufacturers as it relates to EV battery production.

Brace for Future Disappointments. As we’ve mentioned, this will take longer and be bigger than most people think. Our belief that it will take longer implies that there will be disappointments along the way. Here’s our best guess at the top 6 disappointments over the next two years: 1) Tesla may need to raise more money. 2) Tesla may miss on production targets by a quarter or two. 3) Full autonomy may come as late as 2021, not in 2019. 4) There may be a need for another factory to grow annual production above ~600k vehicles. 5) Demand may be negatively impacted when US tax incentives are reduced in 2019. 6) We’ll continue to see competitive announcements from other auto manufacturers and tech companies. While these disappointments will fuel controversy around the story, we believe they do not change the long-term potential of Tesla.

Tesla’s stealth advantage. Not captured in the quarterly results is something much bigger: Tesla stakeholders are on a shared mission to change the world. Tesla’s stakeholders include employees (all of which are shareholders, from the management team to the custodians), Tesla owners, shareholders, and suppliers.

Changes to our Model:

2017 Unit Shipments Adjustments

  • Vehicle delivery estimates increased from 101K to 105K.
  • Adjustment is due to higher Model S and X unit delivery assumptions based on positive comments on the call.

2018 Unit Shipments Adjustments

  • Vehicle delivery estimates increased 308K to 316K.
  • Adjustment is due to higher Model S and X unit delivery assumptions based on positive comments on the call.
  • Previously modeling 4% Y/Y decline in Model S and X unit growth, but changed to flat growth.

2017 Revenues, Margins, EPS Adjustments

  • Revenues increased from $11.2B to $11.8B; driven by higher model S and X unit deliveries.
  • Gross margins decreased from 23.4% to 22.7% due to lack of scale efficiencies related to Model 3 ramp.
  • EPS lowered from ($6.77) to ($7.06) due to lower gross margins.

2018 Revenues, Margins and EPS Adjustments

  • Revenues increased from $20.4B to $21.4B, driven by higher model S and X unit shipments.
  • Gross margins increased from 23.3% to 23.6% due to faster than expected scale efficiencies with model 3 ramp. We believe they can hit 25% gross margins in 4Q18, although it could be earlier.
  • EPS goes up from ($6.76) to ($5.93) due to slightly better gross margins.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. 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.