Order and delivery activity has been bouncing back at Tesla (NASDAQ:TSLA) since April -- at least in North America -- following a horrific start to 2019. This has put the electric vehicle pioneer in position to potentially beat its all-time quarterly record of 90,700 deliveries (set in Q4 2018) in the current quarter. For comparison, Tesla delivered just 63,000 vehicles in the first quarter.
However, Tesla isn't out of the woods yet. Its recent resurgence in orders and deliveries has been driven by unusual factors and could soon give way to another slump.
High hopes for the second quarter
Tesla experienced a sharp slowdown in sales in the first few months of 2019. Nevertheless, CEO Elon Musk remained confident that it was just a blip and that sales would climb to new highs once warmer weather arrived.
Recently, investors have received some good news in that regard. On June 5, Electrek reported that Tesla had delivered 33,000 vehicles in North America alone since the beginning of April, based on leaked information from a company insider. Tesla hopes to deliver another 33,000 in North America in June, according to Electrek. Even if that June goal proves unrealistic, Tesla still has a decent chance of surpassing 90,000 deliveries globally this quarter.
Wall Street analysts -- who may be a more neutral source of information -- agree that Tesla has seen a rebound in sales and deliveries. "More Model 3s were registered in April and May than during all of the first quarter," wrote analysts at JMP Securities (via CNBC). Widely followed analyst Adam Jonas of Morgan Stanley concurred, estimating that Tesla sold 11,300 vehicles in the U.S. last month.
While there's a range of estimates about Tesla's orders and deliveries for the past two months, it seems clear that conditions have improved dramatically compared to last quarter. That said, this rebound may be short-lived.
Timing factors have boosted deliveries this quarter
Tesla's apparent jump in deliveries in April and May was driven by two unusual factors.
First, Tesla had about 10,600 vehicles in transit to customers at the end of last quarter, compared to fewer than 3,000 a quarter earlier. This total included many vehicles bound for customers in North America, due to the automaker's effort to deliver a massive number of cars in the last few days of the first quarter. Those vehicles were delivered in April instead. Had Tesla been able to squeeze in those deliveries during March as planned, the first quarter would have looked slightly less awful, but there wouldn't have been a surge in deliveries in April.
Second, Tesla finally began deliveries of the Model 3's long-awaited $35,000 base model in mid-April. To be fair, most buyers are opting for pricier versions, but Tesla has still gotten a boost this quarter from meeting pent-up demand for the cheapest version of the Model 3.
The Model 3 will never be as cheap as it is now
Bulls might respond to these caveats by noting that Tesla is selling vehicles at a record pace right now (at least according to Electrek). The $35,000 Model 3 has been available to order for months, so the recent rise in sales activity can't be written off as just a short spike related to pent-up demand.
However, that argument overlooks another key sales driver: changes in government subsidies. The federal tax credit for Tesla buyers dropped from $7,500 to $3,750 at the beginning of 2019, driving a spike in order activity in late 2018 followed by a lull to begin this year. That tax credit will fall by another 50% on July 1.
This means that U.S. buyers will never get a lower price on a Model 3 than they are getting today. Tesla was only selling pricier variants in 2018, when the full $7,500 federal tax credit was available. And the federal tax credit will decline by $1,875 after this month before phasing out entirely at the end of 2019.
In other words, this quarter was the best time to buy a Model 3 for anyone watching their wallet (at least in the U.S). As a result, it wouldn't be surprising to see the recent spike in order activity peter out over the next several weeks.
Beware a pause in Chinese demand
Selling the Model 3 in the U.S. is likely to be a lot harder during the second half of 2019 than it has been over the past few months. Unfortunately, Tesla will also struggle to sell vehicles in China -- arguably its most important international market -- over the next six months.
Tesla's sales already began to decline in China last year, due to the growing U.S.-China trade tensions. Tesla plans to sidestep Chinese tariffs on auto imports by opening a new factory in Shanghai soon. The company recently began taking orders for China-built Model 3s, with starting prices about 20% lower than for the imported versions. Deliveries of the locally built vehicles could possibly begin before year-end, but early 2020 is a more realistic target.
Building vehicles in China will dramatically improve Tesla's long-term competitiveness there, but it will crush demand in the near term. Hardly anyone will want to buy an imported Model 3 now when they will be able to get the same vehicle early next year at a much lower price.
It's encouraging to see Tesla's order activity and deliveries bouncing back after a terrible first quarter. However, Tesla will have to weather a few more tough quarters before potentially returning to full health -- and it remains vulnerable in the event of a broader industry downturn.