2016 Roadmap Should Be The Focus When Tesla Reports Q4 2015 Earnings

posted by on Feb 07, 2016
  • Tesla is due to report Q4 2015 earnings on Feb 10th 2016 after market close.
  • Tesla stock has been selling off heavily going into the earnings call on account of Wall Street's concerns regarding Model X production ramp and delivery, as well as the impact of the production of the new model on Tesla's margins.
  • Are these concerns deserved and is Tesla still a worthwhile investment?

Leading electric vehicle manufacturer Tesla (NASDAQ:TSLA) is slated to report Q4 2015 earnings on Feb. 10th 2016 after market close. Wall Street expects Tesla to report fourth quarter revenue of $1.82B, non-GAAP EPS of $0.10 and GAAP EPS of ($0.34). Tesla did not provide specific financial guidance for the quarter but gave general information about how it expects its production and deliveries to trend.

Tesla has a mixed track record when it comes to meeting earnings estimates as shown in the chart below. The company missed earnings estimate by quite a big margin due to higher-than-expected costs in building its recently unveiled Model X.

Tesla Quarterly Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Sep2015 11/03/2015 -1.01 -0.71 -42.25
Jun2015 08/05/2015 -0.82 -1.39 41.01
Mar2015 05/06/2015 -0.7 -0.81 13.58
Dec2014 02/11/2015 -0.48 0.15 -420

Source: NASDAQ

Despite the earnings miss, Tesla shares spiked 10% following the earnings call because the company managed to exceed its delivery guidance. Under normal circumstances, Tesla investors usually focus more on the company’s deliveries with profits taking a back seat.

But things are different this time round because Tesla’s fourth quarter delivery numbers are already known.

Tesla had guided for deliveries of 17,000-19,000 vehicles during Q4, a target it has already achieved. Tesla announced in early January that it had managed to hit the low end of its guidance range after it delivered 17,400 vehicles during the fourth quarter. During its third quarter earnings call, Tesla had said that it intends to deliver per week 1,600-1,800 Model S and Model X vehicles combined in 2016, which works out 83,200-93,600 vehicles for the full year.

Now Tesla managed to deliver 50,580 units in 2015 after growing its deliveries 51% compared to 2014. Assuming Model S deliveries in 2016 grow 45%, then Tesla will deliver 73,340 Model S units in 2016. Using its guidance as a benchmark, Tesla expects to deliver ~10k-20k Model X vehicles in 2016.

Judging by Tesla’s production ramp up  during the fourth quarter, the company is well on target to achieve its Model X target. Tesla built 507 Model X vehicles in slightly over two weeks during the last weeks of Q4 2015, which points to a ramp-up of ~238 vehicles per week, or ~12,370 per year. We can therefore, surmise that Tesla does indeed have adequate capacity to hit or even exceed its Model X production and delivery targets.

But this knowledge has not stopped Tesla stock from getting hammered on concerns about Model X production ramp and deliveries. Tesla stock has tanked almost 15% over the past ten days or so after Morgan Stanley reported on Barron’s that Model X deliveries were tracking below expectations saying:

Lower 4Q Estimates on Fewer Deliveries, Given Slower Than Expected Ramp in Model X Production. Tesla has announced that 4Q deliveries tracked at 17,400 units, slightly softer than our prior forecast for 17,873 units, and more importantly that the miss was driven entirely by a shortfall in Model X deliveries (which tracked at 208 vs. JPM of 4,000). Model S deliveries were higher than JPM expectations (17,192 units vs. JPM of 13,873 units), nearly making up for the shortfall. The announced 4Q deliveries imply full year 2015 deliveries of 50,580 units, toward the low-end of Tesla’s already lowered full year guide for deliveries in the range of 50,000-52,000 units issued at the time of 3Q earnings. We estimate that the slower than expected ramp in Model X vehicle production will pressure gross margin relative to the firm’s guidance (at the time of 3Q earnings) for 4Q margin to be slightly less than 3Q15’s 23.7%.

Morgan Stanley said that the lower-than-expected deliveries would make it difficult for Tesla to meet earnings consensus and would also negatively impact on the company’s gross margins.

But Morgan Stanley’s bearish call appears disingenuous because Tesla itself had said this during its third quarter earnings call:

We expect that Model X will achieve steady state production capacity during Q1 as we do not foresee any significant production, design or supply chain constraints that will impact this plan. Looking ahead, we still remain highly confident of average production and deliveries of 1,600 to 1,800 vehicles per week for Model S and Model X combined during 2016.

We expect our average vehicle sales price to increase slightly in Q4 with more deliveries of highly optioned Model X vehicles. We expect Q4 Model S gross margin to improve sequentially, but initial Model X launch expenses and higher overhead and depreciation allocations will temporarily elevate total production costs in Q4. As a result, we expect non-GAAP Automotive gross margin to decline slightly from Q3. After Model X production stabilizes in Q12016, we expect Model X gross margin to improve rapidly and become comparable to Model S gross margin over the next several quarters, even as we launch a lower priced version of Model X with a smaller battery pack during 2016.

Finally, we expect gross margin in Services and Other to remain positive, but to vary within a relatively wide band given the diversity of businesses reflected in this measure.

 Further down Tesla added:

During the next several quarters, operating leverage should improve with revenue and gross profit both growing faster than operating expenses. Operating expenses should increase slightly in Q4, but reflect a further decline in Model X development expenses, offset by increased costs related to expanding our global sales capability and developing Model 3. We are on track to unveil Model 3 in late March 2016.

Tesla fully anticipated that production costs related to Model X would impact its margins negatively during the fourth quarter so the Morgan Stanley call was nothing new really. Tesla says that Model X will eventually sport gross margins similar to Model S, which implies a shortfall in sales of Model X by so many units has roughly the same impact on Tesla’s margins as a shortfall in sales of Model S. Assuming Tesla only managed to sell half of the 507 Model X vehicles it built during the fourth quarter, the impact on Tesla’s Automotive gross margin (23.7% during Q3 2015) should be limited to around 30 basis points. The rest of the segment’s gross margin contraction will come from higher initial production costs related to Model X production. Tesla did not specify how much this will be but said it will be minimal during the fourth quarter but will improve as the quarters roll on.

It therefore, appears as if investors overreacted to the bearish call by Morgan Stanley. It’s hard to predict at this point if Tesla stock will be punished again after the company allows the investing world to know the actual impact Model X has had on its margins. But even if Tesla stock gets hit again on account of lower gross margins due to Model X costs, long-term investors should focus more on the company’s roadmap and its announcement regarding its Model X production ramp and its plans for Model 3. If Tesla’s roadmap for 2016 is strong, long-term investors should ignore the lower margins since they are temporary, and buy the Tesla stock for the long haul.

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Comments on TSLA stock

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I'm curious to see how Tesla's Norway sales are holding up.

Norway accounted for I think 10% of total Tesla sales in trailing four quarters. Tax policy changes there are making electric cars less attractive.