Tesla: Model 3 Trade On Track, but Is S/X Demand Slowing?

A former Wall Street analyst discloses the topics that equity analysts and hedge fund managers are currently talking about. 

Tesla reported 1Q deliveries of just over 25,000, of which 13,450 were for the Model S, while 11,550 were for the Model X. As I had written about recently, Tesla stock has outperformed over the last several months on increased confidence that the Model 3 will launch this year. The deliveries announcement today will add fuel to that bull thesis, as the company's deliveries were above consensus estimates of ~24,000 units for the quarter, suggesting that the company is on track to meet the high end of their 1H deliveries guidance of 47,000 - 50,000 target. The results were positive overall for the company, and the stock is currently trading up 5% as of this writing. 

However, many investors remain skeptical of Tesla. Looking beyond the Model 3 trade, many investors are debating what is happening to underlying demand for Tesla's older models.


Is Model S/X demand slowing, or is something else happening?

Total delivery numbers have been about 25,000 for the last three quarters. As I detailed in my prior note, a near-term bear thesis is that demand for the Model S/X is slowing materially. Note that while a significant amount of investor focus is on the Model 3, the S/X will likely remain a significant portion of profitability (potentially half of operating profit) 2-3 years from now. As a result, Wall Street investors remain concerned about a potential slowdown in those models. The latest 1Q delivery numbers could suggest that supply and demand are becoming more aligned (vs. Tesla's prior history in which supply has always lagged demand), implying slowing demand for the Model S/X. 

Tesla also didn't disclose order trends in 1Q, which is a departure from prior end-of-quarter press releases. This adds further support to the bear thesis that demand is slowing.

However, the counter to the slowing demand argument would be that the company's focus is shifting away from Model S/X production and towards their Model 3 targets (initial production in July, volume production in September). With that in mind, and given the vehicle's importance in the company's longer-term strategy, it would not be surprising to see production for older models flatten. Additionally, from an investor perspective, many bulls seem largely focused on Model 3 and the longer-term story, and as a result may not care so much about slowing demand in their older models.

Given the two opposing arguments, it is still unclear as to whether demand is slowing as materially as the results suggest, or if something else is going on. The truth is likely somewhere in between; demand is slowing to some degree, and management is also focusing manufacturing on the upcoming Model 3. Customer deposit trends, disclosed in the company 1Q earnings, should shed further light on what is happening to demand for older models. Note that in 4Q, customer deposits declined sequentially by 4% for the first time since 3Q15.

Source: Company filings

Source: Company filings

Digging further into the details, Tesla's Model X production was also above expectations, which was a surprise. Note that the Model X is more difficult to produce, as the doors have been very difficult to manufacture. The beat is a positive report and suggests improvement in the company's manufacturing capabilities..