In the first few months of 2019, there were plenty of warning signs that all was not well at Tesla (TSLA 4.84%). The electric vehicle pioneer implemented numerous price changes -- mainly reducing prices -- and began taking orders for the long-awaited $35,000 base version of the Model 3, hinting at a growing desperation to boost sales.
Nevertheless, there was no firm proof that Tesla was having trouble selling its cars -- until now.
On Wednesday, Tesla reported dreadful production and deliveries totals for the first quarter. It seems increasingly clear that Model 3 demand is not living up to bulls' lofty expectations, while sales of the pricier Model S and Model X are in free fall.
Model 3 demand fails to impress
Tesla built 62,950 Model 3s last quarter and delivered 50,900. Both figures represented big increases on a year-over-year basis. In the first quarter of 2018, Tesla built fewer than 10,000 Model 3s -- and delivered 8,180 of them -- as it was still early in the process of ramping up production.
That said, looking at things on a sequential basis casts Tesla's Q1 performance in a different light. In the fourth quarter of 2018, Tesla built 61,394 Model 3s and delivered 63,150.
The sequential decline in deliveries can mostly be attributed to higher in-transit inventory as Tesla abruptly shifted its delivery mix toward Europe and China rather than the U.S. But even adjusting for that headwind, it appears that Model 3 production and sales have peaked. The only hope for a return to meaningful growth is that Tesla's move to open a factory in China will allow it to significantly reduce prices in that key market.
Tesla tried to put a positive spin on things by stating that Model 3 orders in the U.S. significantly outpaced deliveries in the first quarter. However, that's not as impressive as it sounds, since the majority of Model 3 deliveries went to overseas customers during Q1.
InsideEVs estimates that Tesla delivered 22,425 Model 3s in the U.S. last quarter. (Tesla doesn't provide a country-by-country breakdown.) In other words, Tesla's statement could be consistent with receiving only 30,000 Model 3 orders in the U.S. during Q1. That would be a bad sign for the company, given that it plans to build nearly 100,000 Model 3s per quarter at its factory in Fremont, California, by year-end and the U.S. has historically accounted for the majority of Tesla's sales.
A sales wipeout for the Model S and Model X
While the Model 3 gets most of the headlines these days, the Model S and Model X were a big part of Tesla turning profitable in the second half of 2018. Indeed, gross margin for those pricey models rose to around 30% during that period. As a result, the Model S and Model X likely generated about half of Tesla's gross profit in the back half of the year, despite accounting for less than a third of its total deliveries.
Unfortunately, Tesla delivered just 12,100 Model S and Model X vehicles combined last quarter. That was down from 27,550 a quarter earlier and 21,800 in the first quarter of 2018.
There are a number of possible causes of this sales plunge. The partial phase-out of federal tax credits in the U.S. may have pulled forward some demand into 2018. Better availability of the Model 3 is another factor that could be weighing on demand for pricier Teslas. Trade tensions may be impacting sales in China. Growing competition in the electric vehicle market certainly can't be overlooked. And the recent Model Y reveal could be causing some potential buyers to consider waiting for that model.
Yet one thing is certain. There aren't any meaningful production constraints to blame for the sales decline -- it's all about demand. The only question is how much Tesla is willing to cut prices (at the cost of lower gross margin) to prop up Model S and Model X sales volume going forward.
2019 could be a rough year for Tesla
Tesla noted that a substantial number of deliveries shifted from the first quarter to the second quarter, due to challenges encountered while trying to dramatically increase deliveries in Europe and China. That -- along with initial availability of the $35,000 Model 3 and another step-down in the federal tax credit for Tesla purchases on July 1 -- should be enough to drive a sequential increase in Model 3 deliveries this quarter.
However, getting Model S and Model X output back to the prior rate of about 25,000 deliveries per quarter will be very challenging. Furthermore, Tesla's plan to ramp up Model 3 production over the course of 2019 seems extremely unrealistic. Falling wait times suggest that there may not even be enough demand to support the current production rate after Tesla burns through the initial backlog of demand in Europe and China.
To make matters worse, Tesla's operational challenges and price cuts, as well as the steep drop in Model S and Model X demand, will severely impact the company's profitability and cash flow in 2019. Some analysts expect Tesla to burn more than $1 billion of cash this year, which would leave its balance sheet in a perilous state unless it manages to raise more capital.
Tesla bulls can hope that new products like the Model Y, Tesla Semi, and a future Tesla pickup truck will help turn things around. Yet by the time those models arrive in 2020 and beyond, Tesla could be in a much weaker state than it is today -- and facing more competition than ever.