Tesla Inc (NASDAQ:TSLA) delivers a record quarter. But Tesla stock will remain under pressure.
Shares of electric car manufacturer Tesla Inc (NASDAQ:TSLA) are likely to open in the red today and continue their fortnight long downtrend, after the Palo Alto, California based company said yesterday that it missed its Model 3 production target. In a press release, Tesla Inc noted that it produced 260 Model 3 units and delivered 220 of them. Earlier this summer, Tesla and its CEO Elon Musk had projected production of around 1500 Model 3 units in the third quarter. The actual numbers are way off the mark. Tesla blamed the production target miss on bottlenecks stating "Although the vast majority of manufacturing subsystems at both our California car plant and our Nevada Gigafactory are able to operate at high rate, a handful have taken longer to activate than expected."
Tesla stock is down over 10%.
Considering that Model 3 is one of the central argument to Tesla's current lofty valuation, a big miss on the production target is likely to exert downside pressure on the stock. Tesla stock is already in a downtrend, down over 11% from its recent high of $385 a fortnight ago. The stock has breached several of its key support levels including the 20-day, 50-day and 100-day moving averages. As can be seen in the Tesla stock technical chart below, the 100-day moving average has provided a strong support for Tesla stock on multiple occasions over the past three months. Tesla stock had closed below the 100-day moving average last week. The moving average is now acting as a strong resistance for Tesla stock. Adding to the bearish technical signals, MACD has also made a bearish crossover. With yesterday's disappointing Model 3 numbers, Tesla stock is likely to remain under pressure.
Tesla yesterday announced that it delivered 26,150 vehicles which included 14,065 Model S, 11,865 Model X, and 220 Model 3s in the third quarter. This was the all time highest quarterly delivery numbers. The company produced 25,336 vehicles. Meaning that after five consecutive quarters, Tesla delivered more cars than it produced, which is a good thing from a cash flow perspective as it means a lower amount of cash tied up in inventories. There were 4,820 Model S and X vehicles in transit to customers at the end of the quarter, which will form a part of Q4 sales.
Tesla expects to deliver 100,000 Model S and Model X vehicles this year, which represents 31% YoY growth. While this is a good growth figure, the growth in the second half is likely to be much lower. Tesla expects to deliver around 53,ooo Model X and Model 3 vehicle in the second half, which is 12.4% higher than the comparable period in the last year. The year-on-year growth in deliveries was not so impressive this quarter. 26,150 vehicles represent just 4.5% growth from the last year comparable quarter deliveries. Given the fact that Tesla is valued as a very high growth company, the current quarter growth figures look disappointing.
Tesla needs to deliver on its Model 3 commitments to sustain its high growth valuation multiples. Tesla said that there are no fundamental issues related to Model 3 production or supply chain and that it knows what is to be fixed and is confident of fixing the issues in the near-term. Tesla had earlier announced that it will hit a production rate of 5000 Model 3 units per week by the end of the year. But given the current quarter miss and the steep ramp, the 5000 units per week target looks improbable.
Many analysts have remained skeptical of Tesla's Model 3 delivery timeline given the steep ramp and Tesla's track record on meeting its targets. Morgan Stanley's Adam Jonas, who until recently had been a strong Tesla stock bull, believes that Tesla will be able to deliver only 2000 Model 3's this year and 90000 in 2018, far below the company's guidance. If the actual deliveries are anywhere near Jonas' numbers, Tesla stock could see a heavy correction.
The competition will Intensify.
in addition to the Model 3 issues, intensifying competition could also create problems for Tesla. Several existing automakers have announced their intentions of launching an electric model somewhere in the near future. This includes companies like Volkswagen, Daimler, Ford, and Jaguar. There are also instances of new players, including a maker of vacuum cleaners, joining the EV race. According to a Bloomberg report, 50 new pure electric-car models will come to market globally between now and 2022.
On the other hand, the market size is also likely to increase rapidly given the regulatory push and changing consumer trend. The recent regulatory changes by the Chinese government to reduce its carbon emissions by 2030 will open up a huge opportunity for EV sales. India has also announced its intention of shifting to EV by 2030. China and India are two of the largest auto markets in the world. A lot will depend on how much of the market Tesla is able to capture. Tesla needs a huge market share to justify its current valuation. Tesla has a very ambitious growth target of one million vehicle sales by 2020, which, given the current production rate, looks challenging to say the least.
Tesla stock has hit a speed bump.
Tesla stock had rallied by around 80% for the year towards the second half of June. However, since then the stock has hit a speed bump. In the last three months, Tesla stock is down by over 3%. A miss on second-quarter delivery numbers, questions around Tesla's ability to meet Model 3 delivery targets, steep valuations and huge requirement of cash has kept a check on the stock. Given the high execution and financial risks, Tesla stock remains a risky bet. If you are looking to invest in the auto sector, check out our top stock picks from the auto sector which have outperformed the S&P 500 by over 285%.
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