Tesla (NASDAQ:TSLA) updated its third-quarter production deliveries schedule, and things don't look good for the Model 3 -- which you've probably seen reported already if you follow Tesla in the news. In this week's episode of Industry Focus: Energy, Motley Fool energy and industrials analysts Sarah Priestley and Daniel Sparks look at the entire production-release report and explain why missing the mark this quarter might not be as big of a red flag as it might initially seem.
Find out how Tesla performed on the Model S and X deliveries in the past few years, what its track record is for new product releases like this, and more. Sarah and Daniel also look at some leaked information regarding Tesla's potential upcoming semi truck, what we know about the Tesla semi project, and where that would fit into the company's long-term strategy.
A full transcript follows the video.
This video was recorded on Oct. 5, 2017.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today we're talking energy and industrials. It's Thursday, the fifth of October, and we're going to be discussing everybody's favorite all-electric vehicle maker, Tesla. Joining me on Skype all the way from Colorado is Motley Fool contributor and senior technology specialist Daniel Sparks. Daniel, how are you doing?
Daniel Sparks: Good! Thank you for having me on the show.
Priestley: More than welcome! You are our resident expert, so I thought we could discuss Tesla's update on third-quarter production. You're the best guy to go to.
Sparks: Awesome. Thanks, I appreciate it.
Priestley: As I said, Tesla has updated their third-quarter production deliveries. It caused some headlines and headaches this week. Production of the Model 3, the car pegged as Tesla's more affordable, mass-market offering, reservations which are estimated to be around 450,000, fell far short of the initial production plans. Production issues continue to plague the company. Tesla built just 260 models of the Model 3 between July and September. That's 83% less than the 1,500 promise. The company said in its statement: "There are no fundamental issues with the Model 3 or the supply chain. We understand what needs to be fixed and we are confident of addressing the manufacturing bottleneck issues in the near term." So, Daniel, CEO Elon Musk had cautioned previously that the Model 3 production would be manufacturing hell, and it seems like it might be. What do you think? Is this indicative of a serious problem?
Sparks: I think it is concerning. Investors shouldn't just overlook something like this just because they say things should turn out to be fine in the near term. When you see a miss that big on a car that's this important, investors should take a second look. We should keep the perspective that this is early on that S-curve, the way that automobiles go about their production ramps. When you see 260 vehicles produced when they were promising 1,500, it is big, percentage-wise, but it's small in the absolute number. For some context, they're looking to produce 5,000 vehicles a week by the end of the year. So numbers like these are pretty small compared to that. But it's concerning. I think investors should have an additional reason to pay closer attention during the shareholder letter when they give more information, especially when they come about toward the fourth quarter.
Priestley: Absolutely. And this is the third time this year that Tesla cited production issues as a reason for missed guidance. And for me, this seems like more of a forecasting issue. They suggested they could achieve 1,500 cars only two months ago and then proceeded to miss it by 80%. So analyst expectations are high as a result of this. It seems like this is just continual overstating. You wrote last year some interesting thoughts on this. The article "Tesla Motors: Small Misses on Big Targets Sets the Stage for Huge Growth," you can Google that or feel free to email us at firstname.lastname@example.org, and I will gladly send you a copy of it. It's a great article. Daniel, what are your thoughts on this?
Sparks: I think it's also important we keep in perspective analyst forecasts versus Tesla's. They have in general had a difficult time living up to their forecasts. And like that article, they have some small misses on big targets. But just to be fair, in the near term, I think there is some information on the internet saying they've missed three of their most recent forecasts, but what actually happened was, during the first half of the year, they guided for 47,000-50,000 deliveries, and they came in at the low end of guidance, which might have been below some analyst forecasts. But they actually hit guidance in the first half of the year for deliveries, and they're still on track during the second half of the year. So just this little context that investors should keep in mind. When they messed up is missing on production of the Model 3, which, like we said, is a big deal.
But yeah, the small misses on big targets is something that investors should really think about. You look back since Tesla launched the Model S in 2012, barring the first year of growth in 2013 after that was some 650% growth in vehicle deliveries or something, but from there on out it's been about 50% per year on average. This is some stunning growth, and it's not necessarily the most friendly forecast environment when you're looking ahead each year and saying, "We think sales are going to increase by about 50% this year." So that's something else investors should keep in mind, and the article details it further.
Priestley: Yeah, absolutely. You raised two really good points there. One is, analyst expectations often confuse the situation, because they may not be rooted in anything that the company has come out with themselves. I think if you look, analysts are predicting Tesla to deliver 748,000 cars by 2020, which really calls for 50% growth this year and something ridiculous like 175% next year, 68% the following year, 30% the following year. So you can see these are all given targets that they may not prescribe to in the company. And the other thing is, it's a huge undertaking to introduce a new product line to a manufacturing facility. I know when I worked in manufacturing, the lead times on a new product were always 4 to 6 times longer than a product that has been made multiple times. And this is obviously showing in their results.
Sparks: Right. It does make sense. I think things here with the Model 3 are going to be particularly confusing when it comes to forecasting, especially on a quarterly basis, just because Tesla is calling for such a huge step change. That does raise an interesting point as far as an analogy to last time Tesla had a big step change, when it went from producing the Roadster, a sports car that it no longer makes, to the Model S. At the time, Tesla was producing around 3,000 vehicles a year, and when they told investors they expected to sell 20,000 Model S in the first year of production, investors basically laughed it off and the stock treaded water. But as they went throughout the year, they actually pulled it off and ended up delivering around 22,000 vehicles in 2013. So the only step change we have to look at that was really big is this one, and they did pull it off. Of course, now we're talking about something that's on a totally different scale, and that's why investors should be concerned about this initial misstep. Tesla wants to produce 500,000 vehicles next year, and right now they're producing only 100,000.
Priestley: Yes, absolutely. A little background here. Tesla stock is up almost 64% this year. Shares fell only 1.5% in after-hours trading, and then rebounded really quickly on this news. And some of that is due to the incredibly loyal shareholder base that they have. To put this into perspective, Tesla's market cap, as I'm sure you're aware, Daniel, is larger than General Motors, which is one of the big three U.S. automakers. General Motors sold 10 million vehicles last year and made $9 billion in profit, compared to, what was Tesla's sales last year -- 55,000 vehicles and no profit?
Sparks: I think it was 51,000 or so.
Priestley: So there's a huge difference here. There's a lot of expectation in this stock. And the stock generally plays by different rules. But what's important to realize is, these Model 3 production problems really overshadowed an otherwise strong delivery report, which is what you highlighted to me, Daniel. So it seems investors demonstrated a level head and a holistic approach to these results, which is a rare thing to see on Wall Street, but we continue to see it with Tesla's stock.
Sparks: Yeah. And I did just remember, 51,000 or so was the year before. Last year they were somewhere in between there and 100,000. For perspective, they're calling for 100,000 total deliveries of Model X and S this year, which would be up 31% from last year, so that's where they're at right now.
Priestley: And I think the production issues were really isolated this time to the Model 3. I think lines at the Gigafactory, which we now have to consider, were on plan. Model S and X assembly lines were meeting targets, which, as you pointed out before, is kind of a similar example for what we might see what the Model 3, even though obviously there's a bit more riding on this in terms of volume.
Priestley: Deliveries were up. Tesla on Monday said that its global deliveries, including Model S sedans and Model X, rose 4.5% compared to the year earlier, and they beat the average estimate of 25,900 deliveries. So there was some really good news in these results. It's just so easy to get grabbed by the headlines that everyone wants to write about the fact that they missed their production targets purely because they were so overstated in the first place, I think.
Sparks: Right. Investors should keep in mind that Tesla actually met its delivery targets for the quarter. They didn't actually provide a delivery target for Model 3. But of course, when they said they wanted to produce 1,500, you would assume it would be much higher. But they're sticking to only providing guidance for Model S and X right now because of all the uncertainty surrounding the Model 3. But yeah, they had guided for deliveries in the second half of the year to be higher than the first half, and the first half they were around 47,000 vehicles. And with about 26,000 deliveries now in Q3, now they're thinking that they can deliver about 3,000 more than 47,000. In that regard, they actually did raise their guidance for the full year, which is notable.
And investors should realize that the Model S and X are ultimately Tesla's bread and butter in the near term, and the operating cash flow from those is supposed to help fund the Model 3. So in some ways, this could actually help catapult Model 3 a little faster, because Tesla is expecting these vehicles to do so well. And you know, investors were also thinking that the Model S and X could have peaked that year-ago quarter, which was Tesla's record quarter for combined S and X deliveries, and now we see Model S really kicking back up and Model X at record high for quarterly delivery. So that's something that investors should be happy about.
Priestley: I have to ask your opinion. This is kind of a curve ball, but do you think that with all the news surrounding the delays in the Model 3, people are going to pull back on their reservations? Because it was only a $1,000 deposit, and 450,000 people made these deposits.
Sparks: Yeah, that could happen, but that's a metric I'm not really focusing on, because Tesla isn't, either. Otherwise we would see some strong marketing for Model 3. They're not really interested in helping that number grow. So I think that's something investors should just tend to overlook. There will be a lot of headlines regarding reservations, but until Tesla starts putting some effort into generating new reservations, there's no reason to really be concerned.
Priestley: Yeah, and it's incredible that they have so many reservations without doing a lot of the promotion, which has been their traditional stance. Excellent example of another metric that gets overblown in the media but isn't actually that beneficial for investors to watch. That's great.
Also making news this week was the supposed sighting of a Tesla truck. The photo of the rumored truck surfaced on Reddit. It was uploaded, deleted, uploaded again, resulting in some wonderful conspiracy theories. Anyway, the actual image of the truck, which was on the back of another semi somewhere in California, seems to line up with the teaser images released by Tesla. The headlights curl up and back and, the fairing can be seen in the image separately, which would line up on the top of the cap to make it look almost identical to the shadowy outline image released by Tesla. The tentative schedule date for the official release is the 26th of this month, October. The truck is rumored to have a range of somewhere between 200 to 300 miles on a single charge, some form of autopilot, and potentially going to be just a day cab, meaning it has no sleeper berth. So what do you make of this, Daniel?
Sparks: The Tesla semi is something I'm watching, but not particularly factoring into any forecasts right now. But it is notable to see Tesla wanting to expand into another market, particularly one that can charge premium prices. That's how I'm viewing Tesla's semi in general. Tesla has said, they actually mentioned the Tesla semi in their "Master Plan Part Two," and they're really going for reducing costs. I'm guessing what they mean by that is both in terms of operating costs, as far as, just because it's electric, they're hoping there will be less maintenance. And that's probably also a nod to potentially reducing driver costs in the long term, by introducing self-driving trucks and things like that, since Tesla is pursuing that same technology with its vehicles. There's been some rumors that maybe they'll send these trucks out in fleets with a lead vehicle, which could make Tesla have only one driver. This isn't actually a new idea that Tesla invented, but it's something that they're thinking about doing, reportedly.
Priestley: There's an enormous opportunity in this area, but there's a lot of nuance in the industry between light-duty trucks, medium-duty, heavy-duty. And obviously, the smaller, lighter, lower-daily-range trucks are more likely to adopt this technology faster. But with electrification and automation, especially with the impending restriction on driving time for long haul, Tesla is in the right area, definitely. I think there's is a huge opportunity here, even if it may not be in the next 10 years, but maybe the next 30 years.
But they're not the only player in this industry. TransPower specializes in converting traditional equipment to electric powertrains, is deploying demonstration vehicles next year. Siemens is also involved. Cummins, the traditional diesel maker in Indiana, in their Columbus factory, they're creating a truck called AEOS. The concept vehicle is designed to transport goods in urban areas, so it only has a range of 100 miles per day. But it all demonstrates the fact that there's a lot of people who are interested in this segment of the market. It's not the first time that Tesla has faced industry competition, but arguably consumers buying consumer vehicles and Model S, etc., they have less variables to weigh, given fleet costs and total operating costs that a lot of freight operators have to deal with. Do you think Tesla may be a little out of their element here?
Sparks: What Tesla is bringing to the market here is their experience in electric vehicles. Other auto manufacturers and truck manufacturers, competitors, it would be even more speculation for them for someone like Tesla, since they already have the Gigafactory and so much expertise in electric vehicles. So that's one thing for investors to consider. Also, I think when we actually see this semi, investors should really pair it up against gas semis, because ultimately that's the market here, virtually 100% of it, until some of these other new electric vehicles start getting some attention. So investors should really look to see, is this new semi actually going to compete with comparably priced semis? And that's the same thing that's been true with the Model S and X. No matter how many competing hybrids there are or electric vehicles, they're ultimately going up against comparably priced luxury sedans and SUVs.
Priestley: I think you're exactly right. I think there's certainly a lot to be done in this industry. But right now, I think what's available, which is a tiny sample size, but they're a lot more expensive, 165% more expensive, if you factor in everything. And there's a lot of people who advocate for subsidies in this industry. But I 100% agree with you. Until they can have a value proposition that is competitive with traditional offerings, they won't be successful. What we've seen them do is, we've seen them achieve it already in the consumer space. I think also interesting to note is that the Tesla semi project is being run by Jerome Guillen. I think I'm also mispronouncing that. If you know the correct pronunciation, feel free.
Sparks: I don't know. That sounds good.
Priestley: He's the former Model S program director and VP of vehicle engineering. But, interestingly, before he came to Tesla, he worked for Daimler and led the Cascadia truck program. So, obviously, he has a huge amount of experience in this. And I think everybody at Tesla, including Elon Musk, is aware of the fact of what they have to do to make this doable. He's demonstrated that time and time again in pretty much everything he's talked about. But he gave a TED Talk in April and said that the single-speed vehicle that they're talking about, the electric big rig, will be able to out-torque any diesel semi. And basically, if they can achieve that, I think that they've cracked this huge, huge market.
Sparks: I do remember, I think it was in Tesla's annual shareholder meeting, might have been the TED Talk he did, but Elon Musk really emphasized that they're working closely with truckers. They basically don't want to bring to market anything that they don't already want. So I think that's a really smart strategy, since obviously it's a super-picky market that's transporting commercial products. They have very specific things they need to achieve.
Priestley: Yeah, absolutely. Thank you very much for joining me today, Daniel. Is there anything else you'd like to add?
Sparks: No, I think that was great. Thanks!
Priestley: Thank you very much. That's it from us today. If you would like to get in touch, please feel free to email us at email@example.com, or tweet us at Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Daniel, I'm Sarah Priestley. Thanks for listening, and Fool on!
Daniel Sparks owns shares of Tesla. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cummins, Tesla, and Twitter. The Motley Fool has a disclosure policy.