Tesla Motors Inc shares are down by more than 6 percent ahead of market open on Thursday. The firm said, in an earnings report released after the market closed on Wednesday, that the Model X was giving it trouble and it wouldn’t meet its shipping targets for the year. Many on Wall Street simply aren’t listening.
Elon Musk said that Tesla Motors would sell between 50,000 and 55,000 cars this year, below the 55,000 he forecast in the firm’s last earnings release on May 6. The guidance appears to be a shock to some on Wall Street, but those listening to Musk’s words closely in recent months should have seen this coming.
Musk looks for guidance miss at Tesla Motors
Whispers that Tesla Motors wouldn’t quite reach 55,000 car sales this year started at the beginning of the Summer. In a late-April interview with Japan’s Nikkei, he said he was looking for sales of just over 50,000 cars for the full year.
A couple of days later, when Tesla Motors released its earnings numbers for the three months through March, the firm said that it was looking for 55,000 sales for 2015. Mr. Musk’s comments were swept under the rug, but they’re coming back to haunt the firm’s shareholders on Thursday morning.
Looking at Tesla Motors in the long term
As when Tesla Motors missed its full year guidance for 2014, Wall Street has a discount on the 2015 sales miss. Despite the reaction on Wednesday afternoon through to Thursday morning, most of the early research reports are saying that the pull back is not material for the stock.
Trip Chowdhry of Global Equities Research kept his $385 price target despite the miss and said said that the “near-term operational hiccup” in the building of the Model X should not hurt the firm’s long term fundamentals.
This has been the line that much of Wall Street has taken on Tesla Motors over the last three years. If you value the firm based on its sales this year, its share price is far far too high and could come down a good 60 percent or much more. In order to support a value of $30B, those buying shares need to look far into the future.
Ben Kallo at Baird kept his strong outlook on shares at Tesla Motors despite the poor performance on Wednesday. He said that “Perspective is important, however, as this is a short-term issue, which on the positive side reduces production ramp risk for the fourth quarter.”
Mr. Kallo appears to be happy that Tesla can aim lower so it doesn’t have to risk failure. He said “we would be buyers ahead of the Model X configuration/reveal this month,” and added that the car would be “worth the wait.”
With that in mind, 2015 sales don’t matter in themselves. They only give a measure of how Tesla Motors is getting on as it travels toward a future espoused by Musk. For some, like Mr. Chowdhry and Mr. Kallo, the earnings were a hiccup. For others they were a sign that Tesla Motors may not be able to do what it has promised. For others again it was a sign of something much worse.
Measuring weak demand at Tesla Motors
Though Mr. Musk implied that the lower guidance was mainly down to slower production of the Model X, there are whispers that demand for the Model S is not up to snuff.
John Lovall II, who used to cover Tesla Motors for Bank of America, long held the idea that the firm would not be able to keep demand for the sedan high enough to sustain its future. Lovall said, in a report released after Tesla Motors revealed March sales numbers, that the firm was making cars at a level well below its capacity because of slow demand.
There is simply no way to tell whether weak demand will play into the lower Tesla Motors guidance going forward. The firm has launched a number of initiatives, including a Model X giveaway, in order to spur demand.
Some were quick to judge the firm’s latest effort, a referral program, as a sign of weaker demand, but Dan Galves of Credit Suisse said that there were, in contrast, signs of very high demand for the Model S in the third quarter.
Mr. Lovall, one of the last major Tesla Motors bears on the Sell Side, no longer covers the firm, as right when he said the firm wasn’t likely to reach sales of 55,000 this year on a base of 10,000 in the first three months. Colin Langan at UBS echoed that idea in a report published on July 21.
The rest of Wall Street, however, doesn’t seem to care about those sales numbers.
You shouldn’t care about Tesla Motors
Some investors believe in Musk and his vision for the future of the EV. The June quarter results shouldn’t shake that. Tesla Motors is still going to get the Model X out by the end of the third quarter, albeit in small numbers, and Mr. Musk is still sure that the car is going to be amazing.
He said, in a statement on Wednesday August 5, the the car may be the hardest to build in the world and that the “Sculptural” second row seats were a piece of art that were trouble to put together. Tesla Motors, he says, is constrained by the least lucky supplier, and that means delays can come out of nowhere.
We won’t be seeing much of an earnings boost from the Model X by the end of the year, but Elon Musk never really promised that. He now says he’s going to miss his sales targets by less than 10 percent so that he can get the best car possible out there.
Those with faith that Tesla Motors is doing the right thing, and those that think Elon Musk can accomplish what he set out to do, should not be frazzled by the guidance change. It has no effect on the future of Tesla Motors, and the plan that Elon Musk has laid out.
That won’t stop day traders and options market player from spinning and twisting earnings numbers to support any number of plays on the firm’s shares. Long term investors should, however, know when to leave well enough alone and ignore Tesla Motors.
For those with less faith in Elon Musk, the specter of low demand should be frightening. Unless you truly buy into the Tesla Motors story, and you’re willing to lose almost everything you put behind the firm, there’s little reason to buy share in a $30B firm with no path toward making a profit.
The current slump in Tesla Motors shares began when Pacific Crest said that the firm’s value was about right at $295. Brad Erikson, who wrote that report, kept that price target on Tuesday, but warned, ahead of the reveal, that guidance would be lower.
He doesn’t think that Tesla Motors is going to crash, but he does think that the firm needs time in order to grow its earnings to support its share price. That’s something that those serious about an investment in Tesla Motors should take on board, despite the cries of “market manipulation” all over Twitter.