Tesla CEO Elon Musk. AP Photo/Noah Berger
Tesla’s CEO, Elon Musk, sent an email to all the company’s employees early Friday morning which led to the stock falling $45 or 13% to $302 on Friday. It started off weak on Tuesday, dropping $7, but has recovered a bit and is only down $3 for the day. This isn’t the first time the shares have experienced the down elevator syndrome and it may recover, but this time could be different since the Model 3 is shipping in volume and that is what many investors were forecasting would drive the company to sustained profitability.
Musk wrote in his email that even though Tesla was selling more Model 3’s in the December quarter it will make less profit than the September quarter. And for the March quarter he wrote, “with great difficulty, effort and some luck, to target a tiny profit.” He added that even getting to breakeven will be dependent on selling higher-priced Model 3’s in Europe and Asia which helped the September and December quarters in the U.S., but that is only a temporary situation.
It appears that the push to sell Model 3’s before the full Federal tax rebate was cut in half at the end of December was an indication of the issues Musk just wrote about. The need for the push and now the layoffs may have shown the company its backlog is not as robust as it thought it was.
Wasn’t Tesla Supposed To Make More Money As the Model 3 Ramped?
Tesla sold almost 56,000 Model 3’s in the September quarter and increased that to just over 63,000 in the December quarter or a yearly run rate of 252,000 vehicles. This is below the 400,000 to 500,000 per year that is probably still in the plans, but if enough potential buyers have decided to back away from buying one (such as myself which I outlined the reasons for last month) the company may not have the demand that was indicated in the deposits customers made.
Tesla Motors unveils the new lower-priced Model 3 sedan. AP Photo/Justin Pritchard
Musk included in his email that Tesla was cutting 7% of its workforce while at the same time needing to make more cars. He wrote, “Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company.” Note: I added the italics to indicate the seriousness of this comment. However, unless Tesla’s stock falls substantially, 50% or more, the company should be able to sell more stock to get it through this very rough going.
A key bull thesis may be broken
One of the key bull arguments is Tesla growing revenue at substantial rates , which is needed to overcome the stock’s high valuation. Unfortunately, with Musk’s email analysts are cutting their revenue and earnings estimates, and even uber-Tesla bull Trip Chowdhry at Global Equity Research is now expecting flattish 2019 revenue.
Tesla should generate about $21 billion in revenue for 2018, and Chowdhry had been forecasting 2019 revenue of $29 billion for a 41% growth rate. He had also been estimating operating profit of $204 million in 2018, increasing to $1.9 billion in 2019 or $6.87 in earnings per share. These projections will have to come down and probably substantially.
Jeffrey Osborne at Cowen has an Underperform rating on Tesla with a $200 price target (it had been $250) and he dropped his 2019 EPS estimate from $11.02 to $6.16 and 2020 from $11.16 to $8.88. He is still expecting the company to increase revenue by 15% in 2019 to $24.4 billion but only by 4% in 2020 to $25.4 billion.
Second bull thesis on capital could also take a hit
Musk has touted that Tesla will be able to generate enough free cash flow to fund its capital requirements and won’t need to sell more stock or increase debt. This will be put to the test as the table from Cowen’s Osborne details the potential for $20 to $25 billion needed from 2017 to 2022. With $10.9 billion in debt as of September last year, $3 billion in cash, $920 million in debt coming due in March and the ability to generate substantial free cash flow being much more in doubt, the company may have to sell more stock.
Tesla capital requirementsJeffrey Osborne and Cowen and Company
Chart shows support around $295 and then $250
It won’t be until Wednesday, January 30, that any more details are provided so the stock may be in a holding pattern until then, probably with a bit of downside risk due to the negative news and information vacuum until then. There is some short-term support around $295 with the next major support level at $250.
Tesla 3 year price chartStockCharts.com
If it starts to look like the company can’t ramp the Model 3 with enough profitability and more capital needed to be raised, investors will have to believe that future products (full self-driving, Model Y, Semi, Truck and Roadster on the vehicle side and Powerwall/pack and Solar Roof on the energy side) can not just make up the revenue slack but do it profitability. Since it doesn’t look like Tesla can do this with a quarter of a million Model 3’s being sold in a year, uncertainty could enter investors minds. And we all know investors hate uncertainty .