Tesla Motors (NASDAQ:TSLA) shares are down about 4% at the time of this writing. Why? A new report on Tesla from Morgan Stanley analyst Adam Jonas, whose statements seem to have moved the stock price as often as those of Tesla CEO Elon Musk himself. Here's what you need to know about the lower share price today.
Morgan Stanley cuts earnings and delivery estimates
As Jonas notes in his most recent report, deliveries are absolutely critical for Tesla. As the company ramps up its production and its spending on future models and the Gigafactory, it needs every dollar of gross profit it can muster. And given that auto sales make up nearly the entirety of the company's sales, vehicle deliveries are where Tesla gets the bulk of its gross profit. In other words, Tesla's vehicle deliveries have a large impact on its business.
It's not surprising, therefore, that investors are concerned by a report from arguably the most bullish Tesla analyst out there that predicts Model X deliveries in 2015 will only be 5,000, down from a previous estimate of 15,000. The lower outlook for Tesla's fully electric SUV comes a few weeks after the company delayed the first deliveries for the vehicle by a few months to Q3 2015.
The new figure is likely far lower than most were expecting, given that the car was expected to be on sale for as much as half of 2015 and that there are currently more than an estimated 20,000 deposit-backed orders for the X.
"We have adopted our Model X forecasts not only for a 3Q launch (which we expect to be late 3Q), but also for a slow ramp once deliveries begin," Jonas said in a new note to investors (reported by Barron's). "Our forecasts apply what we believe to be reasonable execution risk on this important model to ensure uncompromising quality of initial units."
Reflecting his lower expectations for deliveries, Jonas lowered his 2015 EPS estimate from $2.99 to $2.45.
He went on to question whether or not manufacturing of the Model X falcon-wing doors is even possible at scale: "We recently raised a question about whether a seemingly mundane attribute of the car, the falcon doors, could prove to be a technical challenge at scale."
But Musk quickly countered this concern, saying on Twitter that the falcon-wing doors will make it to the production version of the car.
Rumors about canceling Falcon wing doors are false. At Tesla, the production car will always be better than the show car.-- Elon Musk (@elonmusk) Nov. 19, 2014
Jonas maintained his $320 12-month price target for the stock, up about 30% from today's levels. His continued confidence, despite lower delivery estimates in 2015, stems from a positive outlook about the longer-term picture for the company.
We believe the Model X is critical to the Tesla story and execution on this product is critical. There is a lot about the Model X which may be easier to execute upon vs. the Model S given high levels of commonality and experience with the factory. However, there are still some unique attributes to the vehicle that could present a near-term challenge. We would look for any hiccups/delays as an opportunity to increase exposure to what we believe is the most important manufacturer in global autos.
Jonas' note to investors, while worth a read, has no new information that should change how investors think about the stock. And even if Jonas is right about a paltry 5,000 Model X deliveries in 2015, what will ultimately make or break the stock is whether or not the company really can ramp up production to levels around 500,000 vehicles per year by 2020 with the help of the Gigafactory and the Model 3.
While Tesla's lowered guidance for 2014 deliveries and a delay to the Model X are certainly detours and may cause concern about the company's ability to execute, Tesla has equally notable positive proof that it may take it all in stride:
- In 2013, Tesla surprised investors by exceeding its guidance for 20,000 deliveries with 22,500, up from just a few thousand in 2012.
- 2014 deliveries are on track to be 47% higher than deliveries in 2013.
- Tesla is predicting Model S sales alone will be up 50% in 2015.
- The company is ahead of schedule on its Gigafactory, with a new time frame of 2016 compared to a previous estimate to begin cell production in 2017.
While Jonas' report is a good reminder for investors that execution is the biggest risk for Tesla stock, his forecasts are based on no new information. Furthermore, the big picture still provides hope that Tesla is likely to execute on its growth plans very well over the long haul.