These financial headwinds, combined with a 31% sequential decrease in vehicle deliveries during the quarter, have raised concerns from investors. During Tesla's first-quarter earnings call, CEO Elon Musk addressed two of investors' biggest questions regarding demand and capital.
How's Demand Faring?
Despite worse-than-expected deliveries in Q1, the CEO maintained an optimistic view on the demand for its vehicles. "[W]e do see strong demand for vehicles, the -- both S, X and 3," Musk said.
Importantly, Musk also said the company is "getting past the overhang of the tax credit cliff, which for us ended in the U.S. on Dec. 31." He is referring to a pull-forward in demand for its vehicles in the fourth quarter of 2018 due to the first scheduled reduction in the federal electric-vehicle tax credit on Jan. 1, 2019. For Tesla buyers, the credit was slashed from $7,500 to $3,750.
Based on an "uptick" in demand for Model S and X after the company updated the vehicles with a new drivetrain that gives them substantially more driving range on a single charge, as well the signs of recovery in demand from the "tax credit cliff," Musk currently believes combined Model S and X demand will return to a 100,000-unit annualized rate. For context, trailing-12-month sales of the two vehicles combined for the period ending March 31 were about 90,000.
Looking ahead at the full year, Tesla expects demand to grow enough to support 360,000 to 400,000 deliveries, representing 45% to 65% year-over-year growth.
Why Not Raise Capital?
When asked why Tesla stayed away from significant capital raises recently, Musk responded:
I don't think raising capital should be substitute for making the Company operate more effectively. So that -- in that sense, I think it's just -- it's important to have strong financial discipline of the Company and just to make sure we don't have extraneous expenses and that we're just being frugal with capital. ... So, I think it is healthy to be on a Spartan diet for a while.
Musk went on to note there may be reasons to tap into more capital in the future, "but this is sort of probably about the right timing," he explained.
The CEO also importantly noted that he doesn't believe capital has been a constraint on its growth. "And if I thought there was a final constraint on growth, we would have raised capital before now."
Reading between the lines, Tesla appears open to raising capital but seems to be prioritizing a goal to become more self-sufficient with its operating cash flow.
Instead, Tesla is currently promising deliveries within two weeks for all versions of the Model 3 across most, if not all, of the United States. That's a huge change from a couple of years ago, when Elon Musk claimed the Model 3 reservations list was growing steadily even as Tesla was "anti-selling" the car, with no advertising, no discounts, and no test-drives available.
Musk Expects A Quick Rebound In Orders
Tesla's projections that free cash flow and earnings will return to positive territory soon depend on a rebound in deliveries. The company's official full-year guidance calls for 360,000 to 400,000 deliveries, including 90,000 to 100,000 in the second quarter. At the midpoint of those ranges, Tesla would have to deliver an average of 111,000 vehicles per quarter in the second half of 2019, 76% ahead of its Q1 delivery rate..
However, it's becoming clear that order activity would need to accelerate dramatically to support that level of growth. During the Q1 earnings call, Musk stated, "So, with the recently announced product improvements on Model S and X, as well as continued expansion of Model 3 globally, we expect the order rate to increase significantly throughout the year ... commensurate with our production levels." He reinforced that point later in the call in response to an analyst's question, noting that "people just generally don't like buying cars in winter."
It's true that auto sales tend to be seasonally weak during January and February. However, the introduction of the $35,000 Model 3 and price cuts for the rest of Tesla's portfolio should have boosted demand. Furthermore, March and April tend to be stronger months, so Tesla's order activity should have already rebounded to whatever level is sustainable.
Instead, Musk's comments on the earnings call indicate that he is counting on order activity to continue accelerating throughout 2019. That should be very worrisome for investors, because it means Tesla's forecast for the rest of the year is likely built on unrealistic assumptions.
Experience shows that Musk's apparent confidence that demand will accelerate throughout 2019 doesn't mean much. For example, Musk stated on Tesla's first-quarter earnings call that he was "optimistic about being profitable in Q1 and for all quarters going forward." Instead, Tesla lost more than $700 million last quarter and expects to report another loss in Q2.
In fact, there are good reasons to doubt that demand will recover, particularly in the U.S., which has historically accounted for the bulk of Tesla's sales. First, Tesla has already exhausted the pool of pent-up domestic Model 3 demand. Second, the federal electric vehicle tax credit for Tesla purchases is set to fall by 50% ($1,875) on July 1, raising the effective price of a Tesla in the second half of 2019. Third, many potential buyers may choose to wait for the Model Y crossover that was unveiled last month. Crossovers are far more popular than sedans today.
Musk is trying increasingly outlandish tricks to pump up demand for Tesla vehicles, such as his recent claim that Tesla owners will be able to make up to $30,000 annually by renting out their vehicles through a robotaxi network as soon as next year. (Most experts agree that a wide rollout of robotaxis will take years or even decades to achieve.) That may persuade some consumers to buy a Tesla, but it isn't likely to be a long-term game changer.
To be sure, there are plenty of interesting projects under way at Tesla. However, if history is a guide, they could all take longer than expected to execute. Meanwhile, demand is cooling for Tesla's existing vehicles, which may lead to a big shortfall in deliveries in 2019 and 2020. That could further stress Tesla's weak balance sheet and drive its share price even lower.
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