Tesla has been quietly increasing production of their vehicles, especially the Model S, Model X, and the Shanghai-made Model 3, which creates more inventory to deliver than anticipated.
With their increased production, Tesla should be in store for another quarter of record deliveries with 112,750 vehicles delivered to their customers.
With a strong beat over analyst expectations, Tesla should see strong growth following the release of their delivery and production report.
(Seeking Alpha) Tesla's (NASDAQ:TSLA) delivery and production reports are often looked at as a key metric for determining the company's performance or growth during the quarter. If deliveries are lower than expected, analysts tend to expect an earnings miss from the company, as they should, delivering a hit to the stock price, though it stands to reason that the opposite is true too. Additionally, production numbers are a key indication of whether or not the company is successfully continuing to ramp its production of the Model 3, another important measure for the company's degree of success. Though for this quarter, more eyes may be on Shanghai than in Fremont. In this article, I will discuss the importance of each metric, provide my own expectations, and create actionable advice for investing.
Production is the source of most delivery surprises because even with all of the demand in the world, Tesla can't sell cars that haven't been manufactured. This means that if Tesla has been ramping production faster than expected, they should also deliver more cars than expected. For Tesla's deliveries I'll start in Fremont, California, where Tesla manufactures the Model S, Model X, and Model 3. After the first quarter of this year, Tesla saw a dramatic fall in their production numbers of the Model S and Model X (Q4 to Q1). This was due to slowing demand and the need to make room for incoming Model Y production in the Fremont facility. In Tesla's third quarter earnings call, Musk said "To be totally frank, we're continuing to make them more for sentimental reasons than anything else. They're really of minor importance to the future." However, Zachary Kirkhorn, Tesla's CFO, later went on to say that the company will be increasing production of the vehicles due to increased demand and the stabilization of Model 3 production allowing them to focus elsewhere. Unfortunately, many news outlets, such as Business Insider, Tech Crunch, and the NASDAQ, covered the negative comments about the vehicles with negative headlines with some not including this important piece of information in their article at all. This means that many investors could have missed this follow-up statement and there could be a surprise jump in sales as a result of increased production. As Tesla stated in their third quarter earnings report, "We are… increasing build rates on our existing production lines." From this, I would expect quarterly production to be in the range of 22,500 vehicles. While this also likely applies to Model 3 lines, the promise of utilizing existing infrastructure to increase the production of their more profitable vehicles is quite promising.
After an average production rate of 6,141 Model 3s per week in Fremont through the third quarter (author's calculations using Q3 Production & Deliveries report), Tesla is looking to step it up for the final quarter of the year. After averaging 5,579 Model 3s per week in the second quarter, Tesla has shown that a 10% ramp is more than doable and a similar ramp would entail an average weekly production rate of 6,760 Model 3s per week for the quarter. I do believe that this number is achievable and is an accurate representation of what Tesla will be able to average through the quarter. While Tesla could reach a sustained production rate of 7,000 Model 3s per week in the quarter, they won't start production at that level, therefore bringing the average production level below 7,000. So at an average production rate of 6,760, Tesla should produce 87,880 Model 3s in Fremont during the fourth quarter.
In Shanghai, Tesla has accomplished what many didn't believe they could. The factory was completed, and permitted to mass produce, within their ambitious timeline, but their new challenge is selling their vehicles and ramping production. With the first challenge already overcome, all eyes are on Tesla's ability to ramp their Model 3 production smoothly. While a repeat of Fremont's blunders is unlikely, due to optimization strategies adopted by the young manufacturer, this doesn't guarantee a successful or speedy ramp. Well, with all signs pointing towards a weekly production rate of 1,000 Model 3s per week as was expected on December 17, it seems production is ramping quite successfully since it began its ramp earlier this same month. That is already far past what Tesla analyst, Adam Jonas, expected the factory's weekly output to be in 2020 and in line with what he expects for 2021. While they only recently obtained their license to sell, they had been stockpiling vehicles before receiving the certification, numbering in the hundreds. By the end of the year, it's likely that Tesla will have produced around 3,000 vehicles. I arrived at this number by assuming an initial stockpile of around 500 vehicles, one week of production at 1,000 vehicles, and the final week of the year at around 1,500 vehicles. From this, we can find a total production number of 113,380 across all of Tesla's vehicles.
To discuss fourth quarter deliveries, I'll get the easier target out of the way first. I expect somewhere in the range of 22,500 deliveries for the Model S and Model X, just around their production and a 29% increase over the previous quarter. This increase would be close to the level that the cars were selling at previously and should be doable seeing as Tesla has produced beyond this level before. Due to the rise in demand, it makes sense to increase their production rate by as much as possible because the vehicles generate more of a profit than the Model 3. So right off the bat, we see a rise in deliveries that many investors seemed to have missed.
As we saw last quarter, Tesla dramatically improved their delivery logistics, with only 200 less deliveries than cars produced. Seeing as how the second quarter, while deliveries exceeded production due to an abnormally large stockpile from the first quarter, ended with over 7,400 vehicles in transit, this is an impressive feat. This quarter, I expect a similar efficiency with their deliveries and expect, at a minimum, 87,500 Model 3s to be delivered from Fremont to their customers.
In China, the logistical issue is a bit different. Due to the aforementioned backlog, Tesla was working at a deficit when they began the process of delivering their vehicles to customers. While they started this process before finalizing their sales permit, I have doubts that they will be able to completely work through their backlog, especially as cars are coming out of the factory at an increasingly faster rate. This isn't to say that no cars will actually be delivered by the end of the quarter, the fact that employees of the Gigafactory will be the first to receive their vehicles certainly won't hurt and may actually allow for relatively high deliveries, with 1,750. Reaching this number would be huge for Tesla in order to prove their manufacturing and delivery capabilities to critics who didn't even believe that the facility would be close functioning by the end of this year.
The reason that I find this number to be achievable is mostly because of Tesla's decision to deliver the first made-in-China Model 3s to their employees. Any vehicles left over from the initial backlog can just be left in Gigafactory 3's lot and taken by the employees that they have been made for. Because Tesla planned to deliver their vehicles to employees first, they have likely made many of the early builds, being produced now, as the orders of their employees, so this is quite likely their plan to achieve the most possible deliveries by the end of the quarter. The vehicles that are being delivered to other customers, which starts Monday, have been shipped to distribution centers already which will also allow for strong deliveries within the two-day delivery time. Now that all three sections are complete, we have come to my expectations for Tesla's fourth quarter deliveries. I anticipate that, in the fourth quarter, Tesla will deliver 111,750 vehicles.
Tesla's full year guidance, which hasn't been adjusted since it was announced at the end of 2018, states that the company expects to deliver between 360,000 and 400,000 vehicles. In the first three quarters, the company has delivered a total of 255,200 vehicles (author's calculations using Q1, Q2, and Q3 delivery reports), 104,800 vehicles shy of the low end of their guidance. While some saw Tesla's ability to reach their goal as near impossible, I have demonstrated that not only is it possible for Tesla to meet their guidance, it is likely. If Tesla does indeed deliver 111,750 vehicles in the fourth quarter, they will smash their previous record of 97,000 and fall even further within their guidance.
With the element of surprise, Tesla is set to jump off of their positive delivery report. As a result, I would recommend taking a long position in Tesla. I would also recommend doing this sooner rather than later in order to capitalize the most off of the general lagging sentiment around the company as it may start to shift before the report comes out. In my opinion, and this is the essence of my thesis, it's incredibly unlikely that Tesla misses, but more importantly, the degree to which they'll surpass expectations is what could mean large profits for investors.
Deliveries are also an important metric to measure the demand for Tesla's vehicles, when taken in context with production. If Tesla is continuing to deliver as many vehicles as their logistical network allows, as I expect them to, this demonstrates that they are maintaining strong demand for their product. As I expect this to be the case, with the maintenance of a strong backlog, Tesla should also be able to further silence the consistent criticism that the company lacks demand. Additionally, if the company is able to say that they've increased their order backlog, even after production and deliveries show marked improvement, as they've done in previous quarters (Q2 and Q3), they will further establish that their vehicles have strong and lasting demand.
While I will likely publish an article detailing my expectations for the company's fourth quarter earnings report later, I think it is safe to say that we can expect a beat there too. As the vast majority of Tesla's revenue is automotive, a greater-than-expected delivery volume will also likely contribute to greater profits than anticipated. Another earnings beat, coming off of their monstrous third quarter earnings beat, would be a major step in cementing that the company is here to stay and continue its recent momentum into 2020. With analysts expecting deliveries to be around 104,000 vehicles, Tesla's ability to deliver 8,750 more vehicles, an 8.5% upgrade, will likely create strong stock movement. Because of this, I would recommend initiating a long position before the delivery and production report is released.