Tesla announced that its Fremont and Buffalo factories are closing production indefinitely. This, of course, is the prudent move, prioritizing employee safety. Given the company’s current $8B plus in cash on hand and the fact that variable production costs will scale down, the company is well-positioned to withstand a production shut down. Other takeaways:
- We don’t know how long this will last and, therefore, we do not have an updated delivery target for 2020.
- Where was demand for Model 3 going into today’s shutdown? Prior to last month, Tesla’s pricing led us to believe that demand was healthy. Specifically, the company has a strategy of producing as many cars as possible and pricing them according to demand. The fact that pricing has not changed in the last three months is a loose indication that demand was on-track entering this period of uncertainty. As a point of reference, Tesla’s last pricing change was a $500 model 3 increase in the Dec-19 quarter.
- Delivery times also support the view that demand was healthy mid-way through the quarter but has, understandably, tapered off in recent weeks. US Model 3 lead times were 3-4 weeks in the first half of the quarter and have more recently declined to 1-2 weeks.
- Putting it together, all bets are off regarding Tesla’s 2020 production and delivery numbers. That said, the company is properly capitalized to resume its trajectory of growing at 25%-30%, ahead of the broader auto industry.
- Here is a link to our previous work on this topic published yesterday.
Update: as of Wednesday, March 18th, Tesla is continuing operations at Fremont, we believe at about 25% capacity. We continue to believe that the company will eventually have to shut down the factory altogether apart from “minimum basic operations” to comply with the shelter-in-place order issued by the county. For now, however, internal emails say that Tesla is receiving “conflicting guidance from different levels of government,” and will move forward with a modified workforce and time-off policy. See more here.
This seemingly imprudent push to remain operational begs the question of why? We argue that for Elon, it’s not about saving the top line from a bigger hit – Tesla has the money to weather the storm – it’s a principle of his that defines his companies and endeavors. Musk wants to do when others are hesitant. It reminds us of when The Boring Company was told it would take a year to receive a permit to dig under LA, so they cleared the SpaceX parking lot and began digging on their own land that day, or constructing a tent to expand Model 3 production. When this strange period is over the Tesla spirit will continue, and we expect the company’s delivery growth to outpace other automakers.
Tesla’s Fremont production facility will likely be shut down at the order of the Alameda County Health Officer. We see this as a dramatic but temporary shock to Tesla’s production that will ultimately have little impact on the company’s long-term outlook.
Tesla is now well-capitalized and not at risk of running out of money. More importantly, a Fremont shutdown does not change the undeniable truth that the future of mobility will be electric and autonomous and Tesla holds a strong leadership position.
Tesla Can Weather This Storm
Two years ago, during the Model 3 ramp, Tesla was at risk of running out of cash with only $2.5B in the bank. Today, a temporary production shutdown, even one followed by a material decline in global demand for new cars, does not put the company at risk of running out of money.
Tesla’s balance sheet is strong enough to weather multiple quarters of a Fremont shutdown. In February, Tesla raised $2.3B in cash, which brought the cash position at the time to around $8.6B. The magnitude of the quarterly cash burn with no Fremont production is difficult to predict. That said, since manufacturing cars has high variable costs related to components and labor, the cash burn will be modest relative to the immediate drop in production.
Deliveries Will Miss Our 2020 Prediction and Exceed the Auto Industry Growth Rate
Given the cascading unknowns, the company will undoubtedly fall short of our December 2019 prediction that Tesla will exceed Street deliveries estimate of 463k in 2020, up 28% from 2019. We’re holding off on updating our delivery estimate at this time.
Investors should shift focus from an absolute production number to a market share number for 2020. We continue to believe that Tesla will outpace the broader auto industry’s delivery growth rate by 25 to 30 percentage points in 2020. In other words, if the auto industry is down 20% in 2020, we expect Tesla deliveries to be up 5-10%.
With a more optimistic view that the world returns to normal in 2021, we believe Tesla could return to a delivery growth rate of 30%, driven by growth in electric and autonomous vehicles.
Market volatility clusters. It always has and likely always will.
When we wrote about the recent market volatility last week, we had just lived through a period where seven of 10 trading days had a move of +/- 3% in the S&P 500. At the time, we noted that only six other periods in history had even had five days in 10 with a move of +/- 3%:
- The Great Depression from 1929-1933 (multiple times)
- The 1937-38 Recession (multiple times)
- The 1946 Post-War Correction
- The 1987 Black Monday Crash
- The Financial Crisis in 2008
- The 2011 US Credit Downgrade
After the continued wild ride over the past few days, we’ve now reached nine days in the past 10 with a move of +/- 3% in the S&P 500. The only other time we’ve seen that consistency in volatility over a 10-day period was in the market crash of 1929 at the beginning of the Great Depression.
For those interested in more history, we’ve seen four straight days of +/- 6% moves in the S&P 500, something that’s only ever happened before in the Financial Crisis. We’ve also seen seven straight days of +/- 4% moves. The only other prior period close was six days of +/- 4% at the beginning of the 1929 crash.
We don’t make these comparisons to suggest we’re entering a severe economic downturn on the scale of 1929 or 2008, as that doesn’t seem a likely scenario still. We make these comparisons to suggest that the volatility we’re seeing is unprecedented and may not be simply explainable by uncertainty. The current period of volatility appears to be feeding on itself more than in times past. Today’s market has the smallest daily influence from active fundamental trading in history with the rise of both algorithmic trading and passive investment allocation. In other words, the effect of those who set prices based on fundamental prospects of a business have less say than ever before, and it may be contributing to more volatility than in past periods of even greater uncertainty.
In uncharted waters, it’s hard to know when the volatility might calm, but I’ll reiterate a message my partner Andrew recently sent to our limited partners: “Patience, conviction, and humility have always served us well, particularly in times of uncertainty.” We don’t know when the markets will calm, but we’re certain that those with a patient and long-term perspective on investing in great tech companies will be happy with the results in time.