The pace of Tesla’s large deliveries is irrelevant
You’re here (NASDAQ: TSLA) inventory has risen again in recent days, after the company easily exceeded analysts’ estimates for its second-quarter vehicle production and deliveries. Although the COVID-19 pandemic took its toll on the electric vehicle maker, it was not as bad as some had feared.
That said, the pace of shipments was not as significant an event as many investors seem to believe. In the last quarter, the offer was the main constraint on Tesla’s results. In the long run, however, demand – and, to a lesser extent, costs – will be the main determinants of Tesla’s success.
Tesla exceeds expectations
At the end of March, Tesla was forced to temporarily shut down its main factory in Fremont, California, in response to the growing COVID-19 pandemic. The factory did not start to reopen until May 11. in contempt of local authorities. While Tesla’s new Gigafactory in Shanghai was busy building Model 3s for the Chinese market throughout the quarter, after reopening in February after a brief shutdown, the temporary shutdown of the Fremont plant significantly limited production. in the last quarter.
As a result, Wall Street analysts expected sharp year-over-year declines in production and deliveries. Just a few weeks ago, many analysts were calling for a quarterly total of less than 70,000. As June progressed, the analyst consensus rebounded to around 83,000.
Last Thursday, Tesla announced that it had built 82,272 vehicles in the last quarter. The S and X models, which are only built in Fremont, accounted for 6,326 production units, compared to nearly 76,000 for the cheaper Models 3 and Y. Deliveries exceeded production, as Tesla slashed inventories built earlier in the year. . The company delivered around 90,650 vehicles: 10,600 S and X models, as well as 80,050 3 and Y models.
This news sparked yet another spike in Tesla stock. Stocks hit a new all-time high above $ 1,300 on Monday: up nearly 500% from a year ago.
Lots of hype
While Tesla’s second-quarter deliveries exceeded updated analysts’ expectations by nearly 10%, the company still delivered 5% fewer cars than the 95,356 deliveries made a year earlier. Tesla’s production and delivery figures may have been better than expected, but they still weren’t good.
Of course, investors could not have hoped for better, given that Tesla’s main factory was closed for almost half of the quarter. However, that only underscores the irrationality of focusing so much attention on the number of vehicles Tesla delivers in a single quarter.
Tesla’s fully diluted market cap surpassed $ 250 billion on Monday. By comparison, delivering 90,000 vehicles in a quarter instead of 80,000 would likely improve cash flow by $ 100 million to $ 200 million. In short, the financial implications are tiny compared to Tesla’s valuation. Additionally, even if Tesla produced twice as many vehicles as last quarter, it still wouldn’t generate much profit relative to its market capitalization. Tesla stock is priced on its potential to generate massive profits in the distant future, making its short-term production and deliveries the kind of noise investors should ignore.
Demand and costs are what really matters
In the long run, Tesla will be able to build as many cars as it can profitably sell. Thus, future demand will be the primary determinant of whether Tesla’s stock continues to rise or falls back to earth. Costs are also a big part of the story. Maintaining a cost advantage through simple designs and purchasing scale for electric vehicle components will be crucial to achieving the best margins in the industry – and could also allow Tesla to introduce cheaper vehicles to the market. the future in order to capture a wider market band.
Tesla is well positioned to outperform 500,000 annual vehicle deliveries This year. It is clear from Tesla’s sales figures in recent quarters that the company could sell even more vehicles if it had sufficient supplies.
Yet even though its long-term operating margin reached 15%, well before today’s mass automakers – Tesla will likely need to increase its annual shipments to at least 3 or 4 million over the next decade to justify its current valuation. While this is a plausible goal, there is no guarantee that Tesla will achieve it, especially if it does not introduce more affordable models. In deciding whether or not to invest in Tesla, investors should focus on information that could shed light on long-term demand and cost trends while ignoring irrelevant news like quarterly production and delivery reports. from Tesla.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.