Wasn’t Tesla Supposed To Make More Money As the Model 3 Ramped?

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 …

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 .

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OPINION: Tesla will reignite the American car industry

Think about the Boring Company, owned by Tesla CEO Elon Musk. It’s proposition was simple: in any city, you have a three dimensional work …

American car manufacturers have been in operation for over a century now. They have easily employed hundreds of thousands of workers over their history and have left a resounding economic and cultural mark on America’s identity.

But when the 2008 recession struck our country, our automobile giants were brought to their knees.

In 2009, both General Motors and Chrysler fell into severe bankruptcy. The Italian company FIAT bought up Chrysler and General Motors was bailed out, with a new owner branded as the modern General Motors Company. Ford barely managed to endure the global recession, reporting annual losses in the billions between 2006 and 2009 but ultimately surviving.

Many explanations circulated in the public discussion during these trying years, some citing short-sighted corporate decisions by the upper levels of GM and Chrysler, others pinning some blame on foreign governments that set up strict regulations to undermine American automobile manufacturers’ ability to compete internationally.

I would imagine a complex set of micro and macro economic factors all influence the partial downfall of America’s once glorious automobile industry, but I also see one harsh yet glaringly obvious explanation.

American cars simply do not impress the rest of the world, and the rest of the world has little interest in buying our, dare I say it, underwhelming automobiles.

That is why the Germans and the Japanese dominate the luxury car market. Think how often you see a BMW or Mercedes or Audi in any relatively high income city in this country, or a Japanese Lexus or Infiniti.

That is why the top five best selling sedans in 2018 in the United States were either a Toyota, a Honda or a Nissan, and not a Ford or GM car.

And that is where Tesla Motors comes into play, and could be the trump card that reignites the excitement in the American car industry.

Tesla is not a “car company,” rather a technology company that specializes in electric luxury cars. It is an innovation company. It is a bold company, and it seizes the risky economic ground Ford and GM never engaged fully, and they have perhaps lost the opportunity forever.

What is this “risky economic ground?” It is not just the simple explanation of a transition from fossil fuels into electric cars, which Ford and GM failed miserably to win the hearts of the market with their electric variants, but rather certain unique engineering feats that Tesla brings to the table that address complex economic problems.

Think about the Boring Company, owned by Tesla CEO Elon Musk. It’s proposition was simple: in any city, you have a three dimensional work environment (tall buildings) with an obsolete two dimensional transportation system (roads). Thus, build a network of tunnels underground that can secure a vehicle on a platform and send it across a city in a few minutes without stopping.

I already know the song the naysayers sing. It’s too impractical. It will cost too much. Earthquakes!

And this is why I assign such value to Tesla and the smaller companies connected to Elon Musk and his great employees. In a world where people complain about issues but never want to propose a solution, Tesla puts one forth.

That sticks with the younger generations, who are rising into the income strata where one day they will be the primary consumers for cars. They will remember Tesla rose to the occasion when others retreated into their echo-chambers.

Then we have the SpaceX Program. The mere fact that the Falcon 9 Rocket has a 96 percent success rate on its 50 missions as of 2018 is a testament to the sheer excitement and support Tesla receives from its fans. Elon Musk has laid out his vision on humanity’s situation, where one day he hopes we will be a multi-planet species capable of colonizing Mars.

Again, the Wall Street pundits will come racing to CNBC to talk about Tesla’s low profitability, its cash burn rate, its competitive risks, all the classic financial jargon you’ve heard from pundits for years. I bet these are the same pundits who thought Amazon was laughable in the early 2000s and thought the housing market was rock solid before the financial crisis.

The truth is that these days, consumers are concerned with quality and not quantity. Financial metrics about profitability and the technical analysis over Tesla’s stock do not capture the underground momentum of changing consumer attitudes. People are thrilled by what they see Tesla and Elon Musk do. There is a genuine excitement and a hunger for dramatic change that Tesla is firmly leading the way in.

In 2012, Tesla sold a few thousand of their cars. By the end of 2018, Tesla had delivered nearly 200,000 vehicles. Large retail and shipping firms like UPS, Walmart, Sysco, and others have already ordered hundreds of Tesla’s semi-truck, anticipating the huge saving costs and logistic improvements an automated trucking system may bring. Tesla’s market capitalization, or the total volume of money invested into Tesla stock, has already surpassed every American car company and is hot on the trail of the prestigious German manufacturers.

There will be many challenges ahead for Tesla, no one can argue that. Such is the nature of the market system where one poor decision could herald a company’s end. But Tesla has already left such a strong impression in its first five years as a company, arguably boasting more innovation in its infant stages than anything Ford or GM has shown to the world in the past three decades.

Only time will truly tell what the future holds for the American automobile industry. For Tesla, though, their philosophy so far seems to be working: better go bold than not go at all.

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Tesla Ready to Open Shop in European After Winning Regulatory Approval

This comes after months of controversial behavior by Tesla head Elon Musk—including smoking marijuana on a live podcast with Joe Rogan—has …

This week, Tesla won approval from Dutch auto regulators to sell the Tesla Model 3 to the European market which many hope will begin to turn things around for Elon Musk’s electric vehicle manufacturer after a string of bad news for the company.

Tesla Model 3’s Are Coming to Europe

According to MarketWatch, the Netherlands Vehicle Authority (NVA) approved the sales of Tesla Model 3’s to the European Market after Tesla satisfied regulators that the Model 3 met the requirements for cars in the European Union. The NVA has governing regulatory authority over cars sold in the European Union as a whole.

Tesla had been expecting approval and has been getting ready by opening pre-orders for European customers last month. Electrek reported last week that Tesla has already begun shipping Model 3’s overseas.

A Good Time For Good News

In recent weeks, Tesla has been dogged by negative press and company restructuring that has spooked some investors.

Recently announcing that they would be laying off 7% of its workforce as a cost control measure has not reassured investors who have been waiting for Tesla to break out in a big way. Layoffs are not usually a healthy sign for a company.

This comes after months of controversial behavior by Tesla head Elon Musk—including smoking marijuana on a live podcast with Joe Rogan—has given investors concerns about the leadership at the top of the company.

Production challenges have come to define the Model 3, fairly or unfairly, so add all of this together and Tesla has had a very rough year, all things considered.

High Expectations for Tesla Sales in European Market

Recently, plug-in electric vehicle sales in Europe have soared 24% over 2018. With the phase-out of some hybrid vehicles and more options for a customer base that has long suffered under high gas prices, the surge in electric vehicles is to be expected and shouldn’t be overstated, but Tesla has high expectations for the European market.

Already, Tesla expects to sell 100,000 Model 3’s in Europe this year alone. Pre-orders have been high since Tesla began taking them last month and they expect to ship 3,000 Model 3’s to Europe every week through February.

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Analysts are predicting that Tesla may break with the trend of other automakers who are anticipating a rough 2019. Jeffries analyst Philippe Houchois says that “Tesla is one of the few [manufacturers] likely to grow earnings in 2019-20.”

Morgan Stanley’s Adam Jonas adds “[Tesla] sees Europe as a very significant market opportunity given the premium market is twice the size of the U.S. one. [Tesla] believes consumer awareness in Europe has significant headroom to improve and sees Germany as the most likely location for a local production facility,”

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Tesla’s Model 3 Is Coming to Europe

After an initial period of challenges and delays for Model 3 production that Tesla (NASDAQ:TSLA) CEO Elon Musk referred to as “production hell,” …

After an initial period of challenges and delays for Model 3 production that Tesla(NASDAQ:TSLA) CEO Elon Musk referred to as “production hell,” Model 3 manufacturing saw significant improvements in the second half of last year. Deliveries of the vehicle in the third and fourth quarter of last year were 55,840 and 63,150 units, respectively. These deliveries were up from a total of about 26,000 Model 3 deliveries in the first half of 2018.

While higher Model 3 production and deliveries have helped the automaker swing to a profit, this was only accomplished by prioritizing deliveries of higher-priced Model 3 variants in North America. But the market for high-end Model 3’s is only so big — and there are signs Tesla is coming close to maxing out sales of pricey Model 3 variants in its current markets.

Fortunately, Tesla still has more major global markets to expand to where it can try to take full advantage of pent-up demand for the vehicle before it brings to market lower-cost versions. One of these markets is Europe, where Tesla is getting ready to begin Model 3 deliveries.

Finished Model 3 vehicles for the European market sitting in a lot.

Finished Model 3 vehicles for the European market. Image source: Tesla.

Expanding to Europe

Netherlands Vehicle Authority (RDW) cleared the Model 3 for deliveries in Europe, reported Bloomberg on Monday. The approval suggests the automaker is on track with its plan to expand Model 3 deliveries to the key market by February.

“European Model 3s off the production line,” Tesla said in a tweet that showed a photo of several Model 3s on Monday.

Tesla is optimistic about the European market. Management noted in the company’s third-quarter shareholder letter that the “mid-sized premium sedan market in Europe is more than twice as big as the same segment in the US.” While this suggests there’s meaningful upside for deliveries of Tesla’s high-end Model 3 variants, investors should also keep in mind that the electric-car maker’s current Model 3 delivery volumes in North America may not be sustainable until lower-cost versions are introduced. Otherwise, Tesla likely wouldn’t be cutting the price of the vehicle.

Also helping support sales of Tesla’s current Model 3 variants, which start at $44,000 in the U.S., will be the company’s expansion to China. In the company’s Jan. 2 update on its quarterly vehicle production and deliveries, Tesla said it also plans to expand Model 3 deliveries to China in February.

Aiming for improved economies of scale

There’s more to Tesla’s overseas expansion than the higher sales it will bring for the electric-car maker. The company’s global expansion of its higher-end Model 3 versions is part of its plan to achieve improved economies of scale so it can finally launch its promised $35,000 version, which will have a lower profit margin than high-end versions. Indeed, the effort is so important that Tesla recently announced plans to cut about 7% of its full-time employees, aiming to keep costs down as it works to finally bring the more affordable version to market.

“Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months,” Musk said in a letter to employees that was posted on its blog last week. “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.”

It would be difficult to overstate the importance of Tesla’s global expansion for high-end Model 3 variants. As Musk emphasized in his letter to employees last week, “There isn’t any other way.”

Of course, if deliveries in North America are any indication of how demand for the vehicle will play out in Europe and China, the company shouldn’t have any problem selling the vehicle overseas. The Model 3 was the best-selling premium vehicle in the U.S. last year, including both luxury cars and SUVs.

Now Tesla just needs to execute.

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Tesla’s Model 3 EV Cleared For European Deliveries As Supercharger Pricing Amps Up

Then, Elon Musk announced that the company would be cutting its workforce by 7 percent in order to increase probability – this came after the …
model 3 2model 3 2

There’s been a rash of negativity swirling around Tesla in the past week. First, the company announced that it was killing its referral program, which gave Model S, Model X, and Model 3 owners sweet prizes (including free Tesla Roadsters). Then, Elon Musk announced that the company would be cutting its workforce by 7 percent in order to increase probability – this came after the company increased its headcount by 30 percent in 2018.

But in a bit of good news for company, Tesla says that its Model 3 has now been given the go-ahead for sales in Europe. Now that the initial rush of buyers in the United States has died down a bit (customers in the U.S. can now get a new custom-ordered Model 3 in a matter of weeks instead of months), opening up the floodgates in Europe is another potential big source of revenue for the company.

model 3 1model 3 1

By expanding its footprint, Elon Musk is bringing his company’s sleek electric sedan right on the doorstep of the big German three: BMW, Mercedes-Benz and Audi. All three German automakers have announced rival electric vehicles to counter Tesla, but none have the breadth of models, long-range capacity or widespread availably of fast chargers (a la Superchargers).

Interestingly enough, with over 115,000 units sold during 2018, the Model 3 was the best-selling “luxury” vehicle in the U.S. It outsold perennial best-sellers like the BMW 3-Series, Mercedes C-Class and Lexus ES.

“[Elon Musk] is creating an entirely new segment of vehicles. And by that, I don’t view Tesla products as luxury products,” said Toyota Motor North America CEO Jim Lentz earlier this month. “Those of us who only separate the world between luxury and non-luxury, we’re missing the point. Tesla has created this new category of a technology-driven product.”

Die Invasion beginnt. Tausende @Tesla Model 3 machen sich gerade auf den Weg nach Europa. Bald werden es zehntausende, hunderttausende, Millionen sein. Und die deutsche Automobilindustrie schaut hilflos zu. 🦕💥☠️ pic.twitter.com/ojHE5cRCdN

— Somehow, we lost. 💥🚙 (@somehowwelost) January 11, 2019

Tesla says that the first deliveries of Model 3 EVs will land in Europe in February. In the tweet above, you can see the initial shipment of vehicles being loaded into a cargo ship to make the long trip by sea. In the U.S., the Model 3 is priced from $44,000, but it will start at 58,800 euros ($66,800) in Europe.

In other Tesla news, Tesla is jacking up Supercharger pricing across the globe by as much a 33 percent. Electrek reports that Tesla used to set Supercharger pricing on a state or regional basis. Now, however, the company is setting prices individually per charging station, making for some wildly fluctuation rates for those seeking a “fuel up” during long-distance travel. The publication cites downtown NYC rates going from $0.24 per kWh to $0.32 per kWh. In some California locations, the rates went from $0.26 to as high as $0.36 per kWh.

model 3 3model 3 3

The higher prices make topping off your Tesla on-the-go more closely approach the cost of filling up your typical gasoline-ending vehicle (especially with average nationwide gasoline prices hovering around the $2.22 mark). However, Tesla is making this move to help improve margins and to help fund Supercharger expansion across the globe.

And Tesla would likely point out that most of its customers charge at home overnight where they would pay much lower rates from their power utility, while reserving Supercharging only for long-distance ventures.

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