Analyst Calculates Tesla Model 3 Cancellation Rate Is A Disastrous 66%

Vertical Group's Gordon Johnson is hardly on Elon Musk's holiday card list: two months ago, Johnson explained why, far worse than even more analyst estimates, there was a gaping $3.4 billion funding hole in Tesla's balance sheet. Well, after yesterday's glaring attempt at stock manipulation deep value investing by Elon Musk, Johnson is now officially at the top of Musk's shit list because overnight the outspoken and contrarian analyst just downgraded Tesla to a street-low price target of $93 (from the not that much more generous $99 target previously).

Why did the Vertical Group analyst take a machete to his price target?

One main reason: according to Johnson's calculations, the cancellation rate on Model 3 is a disastrous 66%, up 33% YTD, or as Gordon says, "Boy… that’s a Lot of Model 3 Cancellations."

Here are the details from Gordon:

Our work (Ex. 1) implies a 66% cancellation rate for the “euphoric” day-1 Model 3 reservations of ~140K. When applying this figure to our est. for 582K in gross reservations through mid-Apr. (i.e., 518K in gross reservations 7/31/17 + 7.55K/month in new reservations 7/31/17-to-4/15/18 [or 64K] to account for a monthly cancellation rate of 1% as of 7/31/17), we calculate sales from 582K in early Model 3 reservations of just 197Kwe remind our readers that in mid-Apr. ’18, TSLA sent out configuration invites to US-based non-owners who made reservations one day after reservations opened up to the public (i.e., 4/1/16); from this, one can imply in mid-Apr. ’18 TSLA had fully exhausted Model 3 reservations made 3/31/16 (i.e., day one); furthermore, as of mid-Apr. ’18, all US-based owner reservations were complete.

Exhibit 1: Tesla Day-1 Take Up Rate Analysis – 66% of Day-1 Reservations (excl. Deferrals) Canceled as of 4/15/18

Moreover, the bearish analyst notes:

(a) over the 5/15/16-to-7/31/17 timeframe, after the initial Model 3 buying euphoria waned, TSLA experienced new orders of just 145K (link for 5/15/16 reservations; link for 7/31/17 reservations), or ~2.5K/week, with net reservations (i.e., adjusted for cancellations) up by just ~1.6K/week over this same timeframe, &

(b) based on TSLA’s 5/2/18 statement (link) that Model 3 net reservations “exceeded 450K”, or >460K when adjusted for deliveries of ~10K cars 3Q17-to-1Q18, when netting this against TSLA’s net reservations of 455K as of 7/31/17 (link), net orders for Model 3 cars increased by a dismal 5K units over the 8 month period 7/31/17-to-5/2/18, or 139 cars/week (this is not a typo).

In short, Johnson summarizes that "either Model 3 cancellation rates have spiked from the initial euphoria period of 3/31/16-to-4/30/16, or new reservations have virtually disappeared."

So what does it all mean?

Well, based on the assumptions we’ve made in Ex. 1, & assuming TSLA hits its ramp-up target of 5K cars/week of production in 2Q18, the company will exhaust all pre-orders sometime in 1Q19 (i.e., 197K in sold reservations as of 4/15/18 - 42K 2Q18 Model 3 cars sold - 60K in 3Q18 - 60K in 4Q18 - 60K in 1Q19 = -25K in pre-ordered cars sold). Beyond this point, TSLA will be selling the lower-priced/lower-margin version of the Model 3, negatively impacting company fundamentals. Moreover, assuming TSLA achieves its 5K car/week output rate & 55% of sales are US-based (as they were in ’17), its share of the US luxury car mkt would have to balloon to ~32% (a feat no car maker has been able to achieve – the Mercedes C-Class currently sits at the top with 17.3% mkt share – Ex. 2).

Exhibit 2: Tesla Motor Club Website Survey – reservation holders deferring vs. configuring

Thus, beyond 1Q19, the Vertical Group analyst notes that Model 3 sales will be limited by demand vs. supply, & growth for TSLA will likely depend on new product introductions (i.e., Model Y, TSLA Semi, & TSLA roadster).

Yet, with the timeline for such introductions, according to Elon Musk, roughly 2 years out (i.e., for new production facilities), not to mention Mr. Musk’s tendency to assume overly optimistic timelines, we believe investors will be forced to question TSLA’s valuation as a growth stock imminently (while we expect Elon Musk to use a lot of one-time items to try to achieve profitability in 3Q18 & 4Q18, as discussed below, we feel this rests largely on TSLA’s ability to sell a record number of ZEV credits, which may prove difficult).

In short, we believe TSLA’s ability to show material revenue growth beyond 1Q19 will prove extremely difficult; in fact, until new products are introduced (i.e., likely 3yrs from now, or 2021), we see TSLA’s ability to continue growing sales in the double-digit percentage range beyond 1Q19 as acutely compromised.

Then, in addition to analyzing Tesla's ZEV credit program (which Johnson believes Musk will have to unleash to achieve profitability in H2), and taking a look at the potential upside for Powerwall sales in Puerto Rico, the analyst notes what is arguably the biggest risk for TSLA, namely the tide of competition; here Johnson calculates that Tesla has already lost ~33% of its European EV share YTD 2018 vs. 2017. The details below:

With information now available on European EV sales thorough Apr. ’18 (link), as detailed in Ex. 9 below, we note a number of new EV & PEV cars have entered the European mkt YTD ’18. And, while many say competition is not a risk for TSLA, the numbers coming out of Europe suggest, strongly, otherwise.

What do the numbers say? Well, importantly, over the Jan.-to-Apr. ’18 period vs. Jan.-to-Apr. ’17, we note the following key findings:

(1) TSLA has seen its combined Model S & X sales fall by 12% y/y on an absolute basis,

(2) TSLA has seen its market share fall by 33% y/y in Europe, &

(3) while TSLA, alone, was bigger than the entire Volkswagen (“VW”) brand in ’17, VW is now more than 2x the size of TSLA in Europe in the EV space.

Consequently, at risk of stating the obvious, with a bevy of pure BEV cars with >200 miles of range slated to enter this US mkt this year & next, we see outsized risk to TSLA’s ability to continue selling its Model S & X, as well as Model 3 vehicles at current margin levels (we remind our readers that the $7.5K Federal Tax credit awarded on each TSLA car will likely get cut in half beginning 1/1/19, further depleting the company’s competitiveness).

As a reminder, here is a side by side comparison of upcoming BEV product offerings:

And the pipeline of EV offerings over the next 2 years.

Putting all of the above together, this is what Vertical's now model looks like:

Update to Our Model – as detailed in our bottom-up TSLA segment model below (Ex. 10), our 2018 rev/EPS ests.  adjust to $20.3bn/-$11.86 vs. $19.1bn/-$14.30 prior (Street $19.7bn/-$7.16); our 2019 ests. edge to  $24.6bn/-$8.73 compared to $20.3bn/-$11.86 previously (Street $28.5bn/$2.28). In short, in our view, as it becomes  clear to investors TSLA will not be profitable in 3Q18/4Q18 (as Elon Musk has stated), at the same time new 100% BEV cars with over 200 miles of range begin selling into the global markets (i.e., the Jaguar i-Pace will be available June 2018, followed by the Audi eTron in September 2018, the Hyundai Kona in November 2018, & the Nissan LEAF [230 mile range] in December 2018 – Ex. 7), we believe fear will begin to “set-in”.

Finally, the proposed valuation: "Applying a 0.725x multiple to our new 2020 rev est. of $21.7bn (Street $34.7bn), our year-end 2019 price objective edges modestly lower to $93/share (-73% downside from today’s closing price) from $99/share previously."


FireBrander E.F. Mutton Thu, 06/14/2018 - 12:46 Permalink

Tesla was ahead of it's time; but it is now past it's missed the is toast...will be sold for pennies on the dollar at some point.

We owe Musk a hat tip for breaking us out of the "Gas only" mentality; we're off in all directions now for car engines...electric, gas/diesel in one motor, hydrogen, NatGas, BioDiesel from Algea...the flood gates are open; and Telsa is going to drown in the flood.

In reply to by E.F. Mutton

Rapunzal Bastiat Thu, 06/14/2018 - 13:23 Permalink

Musk is an overpaid actor and a puppet to the banking elites. Same ilk like gates, Soros, Fuckerberg, Buffet. They are only in place to make us believe. We would understand something is wrong if all corporations have the same 2 names. Rockefellers and Rothschilds. So they have to install talking heads.

In reply to by Bastiat

jcaz zuuma Thu, 06/14/2018 - 13:59 Permalink

Been awhile since we've seen a stock price manipulation to this degree- granted, it happens ever day to some extent- but between Elon buying on margin and Morgan Stanley pumping to its clients,   the artificial short-squeeze is pretty impressive;

My synthetic short isn't worried.   I can stay liquid longer than Elon's hair plugs take to renew themselves.......

In reply to by zuuma

GunnerySgtHartman Quantify Thu, 06/14/2018 - 13:18 Permalink

People are getting tired of waiting for the (almost) vaporware car.  And remember, each order cancellation means the $1000 fee paid at the time of order is refunded.

This, combined with the salaried employee layoffs, confirms my suspicion that Tesla is barrelling in on a cash crunch.

In reply to by Quantify

3-fingered_chemist FireBrander Thu, 06/14/2018 - 12:58 Permalink

At present time, personal electric vehicles make zero sense. Very inefficient per mass/mile traveled. Only time electric makes sense is public transportation where thousands of people can travel and there is no battery involved. Battery technology needs to improve substantially before it can be even on par with gasoline/diesel. 

In reply to by FireBrander

Snaffew FireBrander Thu, 06/14/2018 - 14:11 Permalink

they will ramp tsla up to $370 to finish off the old shorts...these markets are INSANE...a la 1999 insane. as an example--- NFLX has increased its' market cap by 2 years worth of 2017 total revenues in the last 10 days alone.  Blow...Off...Top!

In reply to by FireBrander

not dead yet FireBrander Thu, 06/14/2018 - 14:19 Permalink

It wasn't Musk that broke us out of the "gas only" mentality. It was your friendly one world government loving man made climate change advocates that did it. Which is why countries all over the world are proposing laws to outlaw the sale of new fossil fuel cars in the near future. Germany has proposed no sales after 2030 and all fossil cars off the road by 2050. Musk either got lucky or he saw which way the wind was blowing. In the opinion of many if the genius Musk had hired people who knew how to build cars and kept his paws off running the business Tesla would be a success. There would not big rigs, or wing doors, free charging, or solar panels and equipment sold at a loss just to get a contract for PR purposes.

To show how ignorant some of the people are Musk employed look at their posts after getting fired. As in "I don't feel bad I got fired cuz Elon fired all kinds of qualified people so I know I'm not a failure."

In reply to by FireBrander

not dead yet pocomotion Thu, 06/14/2018 - 14:41 Permalink

They want Musk and a lot of cronies out because they are running the business into the ground. From your post it's obvious you're a fanboy who doesn't recognize the truth when you see it. For the moment nobody wants Musk out because it's his cult of genius that has driven the stock to hugely over priced status. The board knows this which is why they allow Musk to fuck up everything he touches and have given him the outlandish future pay scale. If Musk left the company today the stock would be under a hundred and still sinking by next week as all the dirty laundry gets aired. What serious big money investors want is to leave Musk at the top and never let him touch any aspect of the business while bringing in competent people who know how to build cars and manage a company. From the looks of the resumes of those that have quit it's obvious Musk thought he could change the way cars were built and marketed by hiring people who didn't know squat about making cars. Thus while they praise some the electronic innovations of the Model 3, obviously done by suppliers, the overall build is 30 years behind the times.

In reply to by pocomotion

skeelos Thu, 06/14/2018 - 12:44 Permalink


I invested in Tesla only because I thought it would be the vehicle of choice for terrorists funded by rich Saudis.  Use it to run over people, and then it explodes and catches fire.  What more could a jihadist want?


Al Huxley Thu, 06/14/2018 - 12:47 Permalink

Whether you like TSLA or not, take investment innuendo from ZH at your own peril.  Shorts have had their asses handed to them, and the chart looks set up to inflict still more pain on them.  The ZH bias is brutal, feeds the bitterness, but no thought about profitability.

Al Huxley Arnold Thu, 06/14/2018 - 12:58 Permalink

I don't own the stock, I just think it's stupid to carry a grudge against a company and put out 'analysis' that explains why it's a bad buy or a good short when all the fucking evidence that matters (eg the direction the share price is moving) indicates that the price is going up not down. 

In reply to by Arnold

not dead yet Al Huxley Thu, 06/14/2018 - 14:51 Permalink

The analysis is correct but share price doesn't mean squat about the company. Small timers gamble in Vegas while the big money gambles on Wall Street. The dice may be hot and coming up sevens at the moment and everyone is piling in but eventually reality will set in. Unlike the dice if Tesla can get some good people in who can right the Tesla ship it will be a different story. Currently it's the Titanic on it's way to meet the iceberg while the passengers party on and the gamers who have been making money playing the stock will be the first in the lifeboats.

In reply to by Al Huxley