Tesla Motors Inc stock has gained 20% since the start of December. Will the bull run continue after the delivery miss?
- Tesla reported a miss on Q4 and FY2016 delivery numbers due to "short-term production problems".
- Should investors be wary of Tesla's perennial "short-term production problems"?
- Watch out for the commentary from analysts after today's visit to the Gigafactory.
On Tuesday, electric car maker Tesla (NASDAQ:TSLA) came out with its Q4 and FY2016 delivery numbers, and they weren't good. For the third time in 2016, the Palo Alto California-based company missed on its own delivery guidance, sending Tesla stock nearly 2% lower in after-hours trade. The stock is down more than 2.5% in the pre-market. Tesla attributed the miss to "short-term production challenges starting at the end of October and lasting through early December from the transition to new Autopilot hardware".
Q4 Earnings Could Take A Hit
Tesla announced that it delivered 22,200 cars in Q4 against its own guidance of little over 25,000 cars which it had reiterated in Q3 stating "We expect Q4 deliveries and production to be at or slightly above Q3". For the full year, total delivery numbers came in at 76,200 against the guidance of 79,200. What makes the miss worse is that the guidance of 79,200 cars was a revised guidance. In a Q4 2015 letter to shareholders, Tesla had guided for 80,000-90,000 deliveries during FY 2016.
The miss on delivery numbers by around 2900 units will result in a revenue shortfall of around $250 million in Q4. This will also have a negative impact on Tesla's profitability and cash flows. So, overall, Q4 earnings may not be a great one for Tesla. This is in contrast to Q3 where Tesla not only reported a strong revenue number but also a profit for the first time.
Can Tesla Meet Other Delivery Commitments?
But more than the Q4 miss, it is the repeated misses on the guidance which is making investors nervous. Missing 3 of the last 4 delivery guidances doesn't speak too highly of a company and erodes its credibility. And more than ever, Tesla needs investors to believe in its story. The repeated misses has also called into question Tesla's other guidances including "Model 3" launch and its 2018 production target. Mr. Musk had set a production target of 500K units by 2018, which many believe Tesla will not be able to achieve given its current annual production of 93,000 cars.
The skepticism is growing even on the "Model 3" front. Tesla has scheduled the launch of its low priced "Model 3" in the second half of this year. But many analysts are skeptical of this timeline, especially given Tesla's past performance. Morgan Stanley analyst and a Tesla bull, Adam Jonas believes that "Model 3" will hit the market only in 2018. In a report he had said:
"...our base case is for a launch in late 2018. We have taken this conservative approach to allow for the probability that Tesla will choose to prioritize the quality, cost, performance and lifesaving technology of the vehicle. While Tesla still adopts a high level of vertical integration, we expect the Model 3 to rely even more extensively on 3rd party suppliers than the Model S, potentially increasing the scope of supply-related factors outside of the company’s control.”
Tesla is heavily relying on "Model 3" to drive its profitability and revenues. The company has already received more than 400K pre-orders for the car. So any delay on this front will not go down well with the shareholders. And Tesla knows this. According to a recent report by electrek "Tesla is going “all out” to race the Model 3 to production". If Tesla delivers on its Model 3 promise, then expect its stock price to go much higher.
In yesterday's press release, Tesla had said that "Vehicle demand in Q4 was particularly strong. Q4 net orders for Model S and X, which were an all-time record for us, were 52% higher than Q4 2015 and 24% higher than our previous record quarter in Q3 2016 ". But many are questioning Tesla's assertion regarding strong demand given the promotion and discounts. Tesla has announced that it will delay the scheduled 5% price hike in the UK by two weeks due to "strong demand". Tesla is also extending the unlimited supercharging offer by two weeks. In November, Tesla had announced that it will end the current benefit of lifetime unlimited access to Tesla's Superchargers network by the year end. However, it recently extended the offer, with slight modification, by a couple of weeks. Tesla was found using promotions and deep discounting even during Q3. Also, the Q4 sales of Model S were lower than the previous quarter as well as Q4 2015. Many analysts consider this to be an indicator of slowing demand. (Also read: Solar Roof Over-hyped, Tesla Motors Inc Needs Volume)
Watch Out For The Gigafactory Tour
Given all the risks surrounding it, it is not surprising that Tesla is a heavily shorted stock. In the latest reporting period, the short interest came in at a massive 26% with days to cover around 9 days. While the huge short interest indicates the strong bearish sentiment around the stock, it could also lead to a short squeeze on any positive news. It is possible that a short squeeze could already have contributed to a 10% rise in Tesla's stock price since December 15th. On the technicals front, RSI indicates that Tesla stock is overbought, signaling a near-term correction. Tesla stock is hovering around its 200-day SMA. The SMA has acted as a support line for the stock in past few trading days.
But today's price action is likely to be dictated by analysts commentary after the Gigafactory tour. Tesla is scheduled to take analysts around its Gigafactory tour today to show them the progress made. Gigafactory is one of the centerpieces of the Tesla story. Goldman Sachs analyst David Tamberrino expects the tour to be a positive catalyst for the stock. But if the coverage is not good from the tour then expect the stock to go down. In the long run, Tesla stock continues to remain a risky bet.