Will Sluggish Model X Sales Drag Tesla Stock?

  • Tesla stock has been moving lower after JPMorgan recently cut the company's Q4 EPS estimate citing poor Model X mix which impacted Tesla's margins.
  • JPMorgan, however, had unrealistic expectations for Model X.
  • Model X sales can still ramp up in the coming quarters and in the process improve Tesla's margins.

Tesla stock has been selling off ahead of the company’s Q4 2015 earnings call on February 10 2016 after JP Morgan Chase (NYSE:JPM) lowered its earnings estimate for Tesla (NASDAQ:TSLA) on account of lower-than-expected Model X sales during the quarter.

TSLA stock chart

Source: Tesla stock price chart by amigobulls.com

Below is an excerpt from the analyst's note on Barron’s:

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%.

JPM has cut its Tesla Q4 2015 EPS estimate from $0.26 to $0.10, which is a pretty dramatic cut on account of lower Model X sales, but only slightly below Wall Street consensus of $0.11.

Tesla’s recent announcement reveals that it delivered only 208 Model X vehicles during Q4, way below the 4k units that JPM had projected for the company. But the problem here really is not that Tesla has failed investors but rather that JPM had unrealistic expectations for the company. Tesla sold 17,400 vehicles during the fourth quarter and 50,580 for the full year. The company lowered its full-year delivery guidance from 55k vehicles, to a lower range of 50k-55k in August 2015. The company lowered the high-end of its guidance range again during the Q3 earnings call to just 52k vehicles. Had Tesla managed to hit the high end of its second full-year guidance range, it would have sold ~1,600 Model X vehicles which implies JPM’s 4k estimate was unrealistically high. Hopefully investors fully understand this, and sluggish Model X sales during Q4 should not be a big issue for Tesla stock.

Production of Model X was delayed for years as Tesla struggled to hit the right balance between producing a stylish car and also at the right price point. CEO Musk is on record saying Tesla probably went overboard by making Model X too snazzy. Tesla recently filed a lawsuit against Hoerbiger Automotive Comfort System, the company charged with the design of Model X, for failing to properly design its falcon wing doors. Incidentally, during the two years that production of Model X was delayed, Tesla stock continued to soar.

The positive takeaway from JPM’s downgrade is that investors can expect Tesla’s gross margins to gradually improve in the coming quarters. The company says the lower Model X mix will lower Tesla’s margin in Q4. The converse must also be true and an improving Model X mix should improve Tesla’s margins in the future.

There is, however, no simple way to evaluate if Model X will sport substantially better margins than Model S. Base Model S sells for 70k compared to 80k for base Model X. Model X boasts a host of other features including dual motor AWD that lets the driver dynamically shift power from back to front and vice-versa depending on driving conditions. All the enhancements on Model X should probably have cost Tesla ~20k more to make than Model S. The fact that the vehicle is just 10k more costly than its predecessor probably means Tesla has been able to realize significant cost savings elsewhere--most likely the car’s battery.

The real game-changer for Tesla, however, is likely to be Model 3, which is due to be unveiled in March, and not Model X. Model S is designated by EPA as a large luxury vehicle, whose market in the U.S. is only ~100k vehicles per year. Model 3 will most likely be designated a small luxury vehicle whose market is almost 10 times bigger. If Model 3 is able to grab a similar market share as Model S which has 25% share of its market segment, then Tesla will finally be firmly on the road to achieving its long-term goal of becoming a fully-fledged mass producer of EVs.

Brian Wu Brian Wu   on Amigobulls :
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