Overall, 2015 has been a great year for electric-car maker Tesla Motors (TSLA -1.92%). Going into the year, the primary items investors were watching were the launch of Model X and Model S sales. The company delivered on both of these fronts, bringing the Model X to market at the end of Q3 and growing Model S sales during the year by about 58% -- assuming the company's fourth quarter goes according to plan.
But Musk & Co. missed the mark in a few areas, too.
Tesla store in China. Image source: Tesla Motors.
1. Model X deliveries came in short
Tesla's initial guidance for 2015, which was first laid out in the company's fourth-quarter letter to shareholders, called for "about 55,000 Model S and X vehicles" during 2015. By piecing together some comments from management during the company's 2014 third- and fourth-quarter earnings calls, it was clear the company expected about 50,000 of these deliveries to be Model S and approximately 5,000 to be Model X.
But as Tesla's launch timeframe for Model X slipped from a plan for August to the end of September, management adjusted expectations for 2015 deliveries in its 2015 second-quarter letter to shareholders to "between 50,000 and 55,000 Model S and Model X cars."
And now as Q4 is coming to a close, and there's little sign of a meaningful ramp-up in Model X deliveries yet, it's looking like the company likely won't deliver any more than a few hundred of the luxury SUVs -- a far cry from around 5,000.
2. Gross profit margin is narrower than anticipated
Another area of underperformance compared to management's initial expectations for 2015 has been the company's automotive gross profit margin.
In its 2014 fourth-quarter letter to shareholders, Tesla predicted it could achieve a 30% gross margin on Model S by the fourth quarter of 2015. But the company's automotive gross margin has been stifled throughout the year by a delivery mix shift toward Tesla's lower-priced 70 and 70D models of Model S, as well as continued currency headwinds.
70D Model S.
In its 2015 third-quarter letter to shareholders, Tesla said its automotive gross margin, excluding the benefit of zero emission vehicle credits, was 23.7% on a non-GAAP basis and 22.8% on a GAAP basis. And it seems Model S gross margin for Q4 likely won't be much better, according to this excerpt from Tesla's third-quarter letter to shareholders:
We expect Q4 Model S gross margin to improve sequentially, but initial Model X launch expenses and higher overhead and depreciation allocations will temporarily elevate total production costs in Q4. As a result, we expect non-GAAP Automotive gross margin to decline slightly from Q3.
While we can't know for sure what exactly Tesla expects its Model S gross margin, specifically, to be in Q4, it's unlikely the sequential improvement management referenced above implies a jump from about 24% to 30% in a single quarter. If such a sharp increase were expected, Tesla's overall automotive gross margin -- including S and X deliveries -- likely wouldn't be expected to decline sequentially.
Longer term, Tesla still expects its overall automotive margin to approach 30% by the end of 2016.
Next year will be a critical year for Tesla. With the Model X launch occurring later than expected during 2015, the company's expectations to reach free cash flow positive levels by the end of Q4 have been delayed. With spending rising ahead of a ramp-up in Model X deliveries, and as the company begins to bring a small portion of its under-construction Gigafactory online, Tesla currently looks like it may need to raise funds again in the near future if Model X sales don't take off throughout the year.
Now the automaker is gunning to achieve positive free cash flow during 2016. But it will likely require making considerable progress on these two areas where Tesla missed the mark in 2015: automotive gross margin and Model X deliveries.
