There was a time when Goldman was quite happy to write fawning research reports of Tesla in hopes of getting named lead manager for its next equity or convertible offering (as described two years ago in "How Is This Not Criminal: Goldman Underwrites $2 Billion Tesla Stock Offering Hours After Upgrading Stock To A Buy").
Those days are long gone, however, and this morning we got some more clues why last week Tesla's two top finance executive unexpectedly departed the company. As it turns out, in his grand vision to colonize the solar system, Elon Musk forgot to care about his car company and as a result Goldman now writes that the bank, which has a Sell rating on TSLA stock, expect Tesla to announce its 1Q18 deliveries soon after the quarter ends, likely around April 3, "and per registration data and estimates we follow, the QTD pace is currently down yoy and sequentially."
As a result, we set our Model S forecast to 11,000 and Model X forecast to 11,000, for a combined 22k, down from 24k previously. This would represent a yoy and sequential decrease of 12% and 23%, respectively. We believe this is likely the result of a seasonally softer 1Q, but also as 4Q17 production was negatively impacted by the shift of manufacturing labor to the Model 3 production and as the company sold down its inventory in 2H17. Regarding the Model 3, VIN registration data implies a production rate of approx. 1k/week being achieved at times in 1Q18, but extrapolating to deliveries we see only 7,000 Model 3s reaching customers in the quarter.
Here are the details:
Model S and Model X deliveries tracking down yoy and sequentially
Per our monthly tracking, which takes data from InsideEVs.com, GreenCarReports.com, as well as the individual country registration bureaus in Europe, January deliveries were down 30% yoy, but February deliveries are tracking up 23% (we use an approximation based on the past few months for countries that have not reported; Exhibit 1).
Overall, this drives QTD deliveries to approximately 8,750 vehicles, which is down roughly 100 vehicles yoy and close to 3,350 vehicles behind 4Q17’s first two months (Exhibit 2) – a quarter where the company delivered 28,425 Model S and X.
Using a 1Q quarterly shaping for Tesla deliveries, which is generally weighted more to the third month of the quarter with 1.7x the amount of vehicles delivered in the quarter’s first two months (vs. the overall quarterly average of 1.4x), we see potential for Tesla to achieve 24,000 deliveries, or down 4% yoy (Exhibit 3). Additionally, the company is tracking down 28% from its first two monthly delivery levels in 4Q17, so we also see potential for Tesla to achieve a lower estimate by applying the sequential growth to 4Q17’s total deliveries – which implies approximately 20,000 vehicle deliveries in 1Q18 (Exhibit 4).
We take the average of the two methodologies to inform our quarterly estimate of approximately 22,000 for 1Q18. Overall, we believe this points to Tesla tracking slightly below its 2018 guidance (approx. 100k Model S/X deliveries).
Worse, Goldman warns that Elon Musk may have to cut his Model 3 guidance once again, as the already delayed production ramp appears to be tracking below the target to exit 1Q18 at 2,500/week.
We believe that investors with whom we spoke have been tracking the ramp of the Model 3 through its reported VIN numbers (i.e., sequential vehicle identification numbers) as a proxy for the company’s production rate. Based on the ratio of registered VINs to the company’s 3Q17 and 4Q17 Model 3 production cadence, we believe that Model 3 VINs (highest VIN was 13,843 as of this report) imply QTD 1Q18 production is currently at approx. 7,000. Assuming that the last few weeks in March have a similar 1k/week production rate, we see total 1Q18 Model 3 production registering at approx. 9,500 vehicles. That production rate would fall below guidance of exiting the quarter at a 2,500/week run-rate – though the company likely tests its ability to increase its line-speed at the end of this month given a similar extrapolation at the conclusion of 4Q17.
As for deliveries, current datapoints collected by Goldman suggest only approx. 4,400 Model 3 vehicles were delivered in January and February.
As such, we continue to estimate 1Q18 Model 3 deliveries of approx. 7,000, far below FactSet consensus expectations of 13,800 units. We maintain that the Model 3 ramp will be below company expectations (albeit improved from Model S/X ramps), and note that incremental production issues may continue to appear as the company looks to ramp mass manufacturing along the chassis, body, and final assembly lines.
Still, Goldman goes on to note that the Model 3 ramp being slightly below target at the end of 1Q18 may not be unexpected to investors given current news flow (i.e., VIN number tracking, Tesla confirmed temporary shutdown of the Model 3 line in February), and bullish investors are looking through the update to early July and the 5k/week Model 3 production target.
Based on our conversations, bulls are looking for the company to provide guidance that it can achieve 2,500/week based on run-rate from the few test days that likely occur at the end of the quarter – and they believe should shares likely still see pressure as a result, that TSLA’s valuation could remain buoyant given a continued line of sight to 5k/week. That said, we see the potential for the combination of the slower ramp in volumes and early concerns of vehicle quality / user interface software issues as key areas of focus for deposit holders. In that vein, we see potential for Model 3 depositors to cancel their orders. Should this occur, we believe shares could see significant pressure in 2018. Beyond this, continued margin erosion in the S/X – ahead of competition coming in 2H18/2019, and continued slow progression of the Model 3 launch into 2019 could drive shares lower toward our price target.
Putting it all together, Goldman retains its Sell rating with a $205 price target, and revises its forecast as follows:
We make slight tweaks to our model, though our 6-month price target remains unchanged at $205. For 1Q18, we decrease our forecast for deliveries from 31,000 to 29,000 per our updated estimates above (Model S/X revised down in aggregate, Model 3 unchanged). However, we leave 2019 and beyond volume estimates unchanged. This decreases our 1Q18 EPS estimate to a loss of $4.08 from a loss of $3.85 and our EBITDA estimate to a loss of $118mn (from $78mn), due to the lower amount of Model S/X deliveries. Overall, our 2018 EPS estimate decreases to a loss of $9.23 from a loss of $9.00, while our 2019/2020 estimates remain unchanged at $-2.66/+$3.33. Our 2018 EBITDA estimate becomes $980mn (down from $1,020mn), and well below Street consensus of $1.6bn.