Discounting, Lower Quality Sales and SolarCity Could Keep a Lid on Tesla (TSLA), Morgan Stanley's Jonas Says
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Morgan Stanley analyst Adam Jonas weighed in on Tesla Motors (NASDAQ: TSLA) after this weekend's strong Q3 delivery number. He said reports of vehicle discounting, lower quality sales and SCTY capital needs may limit the market's enthusiasm
Jonas issued 3 key thoughts following the numbers:
1. 24,500 units is far above our 3Q expectations. Model X volume (8,700) accounted for 2/3 of the beat vs. our estimates while Model S volume (15,800) accounted for the other 1/3 of the beat. The tilt towards Model X should be particularly positive for average transaction price in the quarter. The company’s 4Q outlook for deliveries to be in line or slightly higher than the 3Q result (MS at 20,300) would imply a FY volume figure of over 78k units, or around 14% above our current forecast of 68,664 units. The annualized 3Q delivery volume is not only higher than our forecast for Tesla volume for all of 2017 (83,790), but it’s also higher than our combined Model S and X volume for 2018. We had expected Model S volume to be slowing more significantly given the age of the product and we had expected Model X volume to continue to reflect challenges in achieving high quality of initial deliveries (ie. the falcon wing doors, door software, etc.) There were media reports (e.g., Bloomberg, CNBC, Fortune) that
cited customers who said they had been offered discounts on new vehicles - not typical for Tesla. CEO Elon Musk responded to these claims in an email (also published by Bloomberg) and on social media, tweeting : "Corrective action taken. Seems to be limited to a small number of cases, but thanks for letting me know" and reiterating that he does not want there to be discounts on new Tesla vehicles going forward.
2. We do not believe the strong 3Q sales performance changes the company’s previously stated intentions to raise new capital. While one cannot easily determine the impact on profit and cash flow, we believe the company would still have consumed some cash in the quarter. Our current forecast based on the unaffected sales numbers (20,336 estimate for 3Q) is for free cash burn of $700mm (US GAAP) or $500mm burn adjusted.
3. Given recent news flow around the company’s financing requirements and SCTY, we would expect the market to apply a reasonable discount to the level of commercial momentum demonstrated in 3Q. Details around the SCTY transaction, Gigafactory investments, Model 3 development and investments and the pace of cash consumption at the company may continue to command more attention than the 3Q delivery numbers. That said, we anticipate intense scrutiny over the knock-on impact to profit and cash flows once the full numbers are released. Any sign that the company’s pace of cash consumption has moderated from the pace of $2bn per year could be seen as a welcome relief on the shares that are down 14% YTD and that haven’t really moved in over 2 and a half years.
The firm maintained an Equalweight rating and price target of $245.
Shares of Tesla Motors closed at $213.70 yesterday.
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