Elon Musk, and Tesla stock, are facing gale force headwinds today, so to speak.
Shortly after we reported that the SpaceX "Starship Hopper" space ship had been blown over by a 50mph gust of wind - reportedly the kind a space ship will never encounter as it enters low earth orbit - and which has since been unofficially renamed to the Starship Potemkin, moments ago TSLA stock tumbled following a Bloomberg report that, confirming the bulls worst fears, demand for the Model S and X is simply not there, and as a result the company has reduced production of the two key products:
“We recently announced that we are no longer taking orders for the 75 kWh version of Model S and X in order to streamline production and provide even more differentiation with Model 3,” Tesla said in an emailed statement. “As a result of this change and because of improving efficiencies in our production lines, we have reduced Model S and X production hours accordingly.”
As Bloomberg adds, Tesla "reduced the amount of hours it’s producing Model S sedans and Model X crossovers after getting rid of the option for customers to order the vehicles equipped with entry-level batteries, according to a spokeswoman."
Chief Executive Officer Elon Musk announced earlier this month that Tesla would no longer take orders for the 75 kilowatt hour version of the Model S or Model X starting Jan. 14. At that time, there was at least a $15,000 difference between the 75D and 100D versions for the two models.
The news also comes just hours after we reported that Porsche has decided to double production of its "Tesla Killer" model, the Taycan.
We have a sinking suspicion that the two events are linked.
The news sent Tesla stock tumbling over 5%...
... to the lowest price since October.
Finally, adding insult to 50mph wind gusts, RBC this morning downgrading TSLA to Underperform, with a new price target of $245 down from $290 previously, with analyst Joseph Spak noting that "the company seems to be more tactful with messaging which is a long-term positive, but means downward pressure to growth expectations - which in our view are too high to justify current levels, let alone to add to positions."
In light of the company's press announcement, Spak was spot on.
Here are the other key highlights from today's RBC note:
- For years, Tesla sold the dream of transportation disruption and fantastic growth. This served the stock well turning Tesla into a top 6 (at times top 3) valuable auto OEM despite delivering a fraction of units of others and nary a profit. A stock should of course discount future cash flows and the market took the promises of Tesla and their future growth potential to justify lofty valuations while Tesla took capital needed to support their endeavors.
- But the rubber appears to be hitting the road as the realities of Tesla becoming a volume player, the challenges to scale and deliver high volume at high ASPs/margins are coming to a head.
- Whether its cutting the price of their lineup by $2k/unit, admission the federal tax credit expiring will hurt, acknowledgment that Tesla can't sell at $35k Model 3 profitably and costs need to come down, or language around full-self driving - we'd classify recent commentary and actions by the company as more realistic. This is likely to cause a review of model assumptions leading to negative expectation revisions.
- A review of potential supply capacity and demand raises concern. On supply, we believe a reasonable max Model 3 production range for Tesla 260-312k. On demand, the $2k price cut and talk about having to lower cost further as federal tax incentives subside confirms our view that the bulk of demand is at a lower price point that Tesla can't access yet profitably. Consensus is expecting 300k M3 deliveries, so near all out. RBC at 260k deliveries. A review of 2021 potential expanded capacity and expected deliveries also reveals a rosy scenario. At the end of the day, Tesla is trying to manage luxury profitability levels towards volume units. We believe this will prove difficult. Stronger unit growth assumptions require lower ASPs/margins assumptions (and likely more capital).
- Given 2019 deliveries are likely to be close to 4Q18 run-rate, but with a price/mix headwind, 3Q18 may have been peak profitability this decade.
- It's not that we don't believe Tesla can grow over time, our model shows solid LT growth. But the current valuation already considers overly lofty expectations. For instance, let's assume 1mm units @$55k ASP, 12% EBIT margins, no interest/equity raise all by 2025. This is undoubtedly solid earnings, but at a more "mature" 15x P/E, the discounted back value is ~$195, meaning even in an optimistic case at least 1/3rd of today's price is an "Elon premium".