Tesla (TSLA) Checks Show Solid Model X Orders, Aggressive Model S Discounting - Pacific Crest

Pacific Crest analyst Brad Erickson expects Tesla's (NASDAQ: TSLA) Q3 Model X deliveries to be solid, and he thinks this may provide some reprieve for the bulls. However, he also thinks the declining quality for Model S demand poses ASP and margin risk and calls longer-term demand into question. Overall, he remains cautious.

Erickson explained, "Based on conversations with 20 Tesla sales centers around the United States, we expect deliveries to be relatively in line with our estimate of 22,000 deliveries, or 90% y/y growth. Based on our checks, we think Model X deliveries could actually be a bit above our forecast of 9,000 while we expect Model S deliveries to be more in line with to slightly below our estimate of 13,000."

The analyst continued, "While we think Tesla is tracking to the low end of its previously stated delivery target of 80,000-90,000 for 2016, it is using various discounting mechanisms to do so, which is cause for worry. First, we found continued traction of the $9,000-cheaper 60 kWh Model S versus the 75 kWh option, which is dilutive to gross margin by an estimated 1000 basis points. Second, we think as many as a third of current Model S orders are coming from Model 3 reservation holders opting for the newly created two-year (and less expensive) lease. Finally, we found Tesla has been employing a deeper discounting formula to drive sales of inventory models, with all offers expiring this Friday, the last day of the quarter."

Erickson concluded, "While we believe the SolarCity (SCTY) merger will ultimately get done, we think the car business, which should account for more than 90% of revenue if the SCTY deal goes through, has several hurdles yet to clear, namely how it will bridge demand all the way to Model 3 late next year. Bulls could be optimistic about strong deliveries (which we expect); however, Tesla's clear tactics to improve optics in the face of slowing demand would likely outweigh positive deliveries and as a result keep us cautious on TSLA."

Pacific Crest reiterated a Sector Weight rating on Tesla Motors.

For an analyst ratings summary and ratings history on Tesla Motors click here. For more ratings news on Tesla Motors click here.

Shares of Tesla Motors closed at $205.81 yesterday.

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