Do Tesla's Recent Stumbles Raise A Red Flag?

  • Tesla stock has received quite a jolt after the company posted yet another delivery miss for the second quarter.
  • Tesla blamed the miss on a steep production ramp and too many vehicles still on transit.
  • This is the third consecutive quarter that Tesla has missed delivery targets. Should investors be concerned?

Tesla (NASDAQ:TSLA) stock was down more than 4% in early trading a day after reporting that it had managed to deliver just 14,370 vehicles during the second quarter, missing its own forecast of 17,000 units. The stock recovered since then. Tesla pinned the large delivery miss on:

" the extreme production ramp in Q2 and the high mix of customer-ordered vehicles still on trucks and ships at the end of the quarter, Tesla Q2 deliveries were lower than anticipated at 14,370 vehicles, consisting of 9,745 Model S and 4,625 Model X."

So basically Tesla said that it was forced to produce half the quarter's output during the final four weeks of the quarter. Tesla also added that a lot of the vehicles that were ordered were still in transit by the time the quarter came to a close:

"In total, 5,150 customer-ordered vehicles were still in transit at the end of the quarter and will be delivered in early Q3. That amount was higher than expected (there were 2,615 vehicles in transit to customers at the end of Q1) and is more than a third of the number of cars that completed delivery in Q2."

But that was just part of what went wrong for Tesla. A report has emerged that a Florida resident had been killed while driving his Model S on Autopilot after the vehicle's motion sensors failed to detect a white tractor-trailer that made a sudden turn at an intersection on a non-controlled highway. According to Tesla officials, this is the first time a fatality had occurred with one of its vehicles on Autopilot after logging more than 130 million miles. Tesla was nevertheless lambasted by the media for not disclosing the tragedy earlier though the company defended itself saying it was waiting for the NHTSA to start investigating the incident.

Stumbling Moves

So this is turning out to be a trend where Tesla is consistently missing delivery forecasts by quite a big margin. During the first quarter, Tesla delivered 14,820 vehicles coming up short of its Q1 forecast of 16,000 units. The company now faces significant back-half pressure to meet its guidance for 50K vehicles for the third and fourth quarters combined. If Tesla manages to hit that lofty goal, it will only have managed to deliver 79.18K vehicles and fall short of its earlier guidance of 80K-90K vehicles for the full year.

Many Wall Street analysts believe that Tesla's delivery miss raises a red flag. Some have even opined that Tesla's difficulty in maintaining steady production for Model X is too serious to ignore and estimated that up time could be as low as 50%.

Perma-bulls like Deutsche Bank, however, remain optimistic that Tesla can still manage to hit its lofty 2016 delivery target. DB noted that half of the 18,345 vehicles that Tesla produced during the second quarter occurred during the final four weeks of the quarter which underscores a steep production ramp-up. According to the analyst, TSLA produced close to 2,000 vehicles per week by the end of the last quarter but would need to raise it about 10% to hit 2,200 vehicles per week during the third and fourth quarters to meet its 50K target.

Deutsche Bank clearly believes this is achievable. The company lowered its 2016 EPS estimate for Tesla from $0.09 to -$0.42 but still maintained a high price target of $290 (34% upside to current price).

But Tesla's consistent inability to meet production targets is worrying because it's coming at a time when it's expected to churn out 500k Model 3 vehicles over the next two years. Should investors use Tesla's recent stumbles as a canary in the coal mine or is it still too early to give up on the company?

Model X Woes

It's instructive to note that much of Tesla's inability to meet production and delivery targets is still tied to production challenges for Model X. The 50% up time that analysts are estimating for Model X is unusually low for an automaker. Tesla has in the past blamed its production difficulties for Model X on making the car too snazzy. Apparently, Tesla is no Ferrari and is yet to master the art of manufacturing a complex car.

Luckily for investors, Model 3 will not be anywhere nearly as snazzy or complicated as Model X. In fact, Model 3 won't even be as complex as Model S, which Tesla has generally not had much trouble with. Model 3 though will still boast an impressive array of features. Key differences between Model 3 and earlier Tesla models include a minimalist interior. But perhaps one of the most important features of the upcoming vehicle is a de-cluttered dashboard and a lack of physical controls, which points to a clear emphasis on self-driving.

The latest Model S accident has definitely put the world on red-alert regarding the safety of self-driving vehicles. But the media too has played a big part, hyping the event out of proportion. Tesla's Autopilot safety record of one death for 130M driving miles is considerably better than the average of 98M miles of driving for every fatality on U.S. roads and much better than the global average of one death for every 60M driven miles. It's also important to note that the driver who was killed ignored a slew of warnings by Tesla's Autopilot, which is still in beta, to keep his hands on the wheels. No technology is ever 100% perfect, but I believe the safety record for Tesla's Autopilot speaks for itself, especially considering that it's still embryonic. Tesla's Autopilot learns from data shared from each Tesla that uses it and will continue getting smarter with time. But, for now, the feature should be used more as a driver-assist rather than full autopilot as the company clearly warns.

Back to the nagging question of whether Tesla's consistent challenges with Model X production raise a red flag, I don't believe it's very material at this point. Model S is currently outselling Model X at a ratio of more than 2:1. Model X does not have significantly better margins than Model S so Tesla could conceivably decide to scale down its production once Model 3 production hits high gear. In any case, investors' attention is likely to shift to Model 3 pretty soon.

Over the next 18 months though, Tesla stock could prove to be a battle ground if Tesla encounters serious problems with Model 3 production ramp. But currently, no such issues have been raised. Investors will be eagerly waiting to hear about ''Tesla Secret Masterplan'' which the company first floated in 2006, and which CEO Elon Musk recently said he will soon disclose. I still rate Tesla as a good long-term buy at this point.

Brian Wu Brian Wu   on Amigobulls :
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