Tesla Misses Q1 2019 Expectations with Increasing Competition

The first quarter of 2019 was expected to be a tough one for Tesla. The cut in the US tax credit for Tesla cars from January 1, 2019, model upgrades, bottlenecks due to overseas deliveries affected the company’s performance.

The following are the key highlights from Tesla’s performance in Q1 2019:

  • The company reported a net loss of US$702 million and its cash and cash equivalents reduced by US$1.5 billion from Q4 2018, ending at US$2.2 billion.
  • Gross margins fell to 20.3% in Q1 2019 from 24.7% in Q4 2018, for the automotive segment.
  • Production and deliveries declined by 11% and 31% respectively, crossing 77,000 and 63,000 in Q1 2019
  • During Q1 2019, the company upgraded the Model S and X drivetrain and suspension, increasing their range. Moreover, these models will now be able to charge quickly supporting 200kW from V3 superchargers
  • The company plans to launch an in-house insurance product in May 2019, which would be ‘much more compelling’ for Tesla’s owners compared to third-party insurance.

Counterpoint’s View

  • According to Tesla, there were logistics and production bottlenecks while tackling the huge demand from overseas. This led to reduced deliveries. However, considering the decline in production and deliveries, one can infer stabilizing demand for Tesla cars with increases in electric vehicle offerings from other OEMs like GM and BMW.
  • The US$1.5 billion decline in cash and cash equivalent was mostly due to paying down debt, worth US$920 million, coupled with an increased number of vehicles in transit to customers at the end of Q1 2019.
  • Tesla’s in-house insurance product will lower insurance premiums on its cars, reducing the overall ownership costs. It will also open an additional revenue stream for the company, and develop another service in Tesla’s increasingly verticalized and service-oriented ecosystem.
  • The company will continue to benefit from its experience and will be re-using its developed platforms on the new models. For instance, the capital spends per unit capacity for the Model 3 factory in Shanghai is less than half that of the Fremont factory. Upgrades to the Model S and X reused the motors and associated technology from the Model 3 to increase vehicle range.

Expectations for Q2 2019

  • Due to logistics bottlenecks, the company delivered half of all Q1 deliveries during the last 10 days of the period. Car deliveries will improve in Q2, to an extent, with improving production and logistics learning curves, and in Q2 many unfulfilled Q1 orders will be realized. However, Tesla’s estimates of delivering 90,000-100,000 Model 3 in Q2 seems optimistic.
  • The sales also suffered due to the US tax credit cuts for Tesla cars to US$3,750 from US$7,500. The demand is expected to recover with car buyers eventually accepting the revised prices.

Gross margins are expected to fall during Q2 with an increasing share of lower-margin Model 3 in the sales mix. However, the upgraded Tesla Model S and Model X will help offset the downward pressure to an extent, during Q2.