Tesla: Story Still Hinges on Demand after Autonomy Day and 1Q Results

My last post on Tesla was just before two major events - Tesla's Autonomy Investor Day, and Tesla's 1Q earnings results. Here are my thoughts following an avalanche of new information: 

We still don't have great visibility into what demand will look like in 2Q

  • This is still the key question around the stock and what I think investors should focus on. Is demand falling, or is 1Q a short-term blip due to logistical issues?

  • Investors wanted hard datapoints on near-term demand. Elon gave general, optimistic comments but didn't give investors the hard proof that demand had returned (which they might not have in hand, at least not yet).

  • At the same time, Tesla pointed to numerous one-time issues that impacted 1Q results. These were largely the issues I highlighted before, including the discontinuation of the entry level S/X for most of the quarter, and retooling needed for the S/X refresh. Management noted that S/X was production constrained and could not meet demand for higher trim models.

  • When you exclude the sales adjustment, and you exclude the charges, 1Q operating results were largely in line with expectations.

So why has the stock declined so much?

  • It's clear that there is a segment of the bulls that are paring back their positions with Tesla at new lows

  • Hard to blame them. We sit at a point where risk is arguably at its highest. We have 1 datapoint of lower demand, and a dozen one-time explanations that feel insufficient to many. Next datapoint (2Q) will more clearly establish whether it was one-time or longer-term issues. Investors, both long and short, should be asking if they want to be exposed to the risk of such a binary event, and whether they have enough confidence in their views.

  • Also clear that the market does not believe Elon's 90-100k deliveries guidance for 2Q. Consensus sits at 87K units, below the low end of the range.

The key question that largely determines your view on where the stock is going: Does Tesla have enough demand to sell at similar levels to the other major premium sedans?

  • As I had written in my last note, there is a large market for $40-60K sedans of over 2 million vehicles globally. Of $30-60K, there's over 4 million

  • Audi, BMW, and Mercedes all have models that sell north of what Tesla is targeting this year. The BMW 3-Series and 5-Series sell close to 400K units each. The Mercedes C and E class both sell north of 400K units each. And the Audi A4 and A6 each sell about 300-400K units. 

  • What prevents the Tesla Model 3 from selling as many units as ONE of those models? I can think of two major buckets of issues that might prevent them:

    • Awareness. The period in between when a model is launched (and primarily fulfilling a backlog of orders) and when the model is being ordered by new customers is a difficult one, as you need word of mouth to spread sufficiently by the time you're in the second phase.

    • EV-specific issues. There are a number of reasons for why consumers, even with the awareness, might be hesitant to buy an EV. You could be wary of electric vehicles in general, or afraid of range anxiety, or lack access to home charging (as you park your vehicle on the road).

  • At the same time, Tesla's vehicles are more differentiated than an Audi vs. a BMW and are beloved by many. We're not talking about a slightly different curve in the back. The differences are large and immediately noticeable on a drive (i.e. the quiet ride, the fast acceleration, the large monitor and the clean interior, etc).

  • My own view: I still struggle to see why Tesla cannot sell 300K Model 3s, and 400K total vehicles this year. Those two buckets of issues can be large, but the market is just so enormous, and Tesla is changing the way people perceive electric vehicles. 300-400K seems doable.

  • The area where I could be most wrong on is timing, in my own view. I believe demand will come, but if it comes a year from now, it would create a meaningful delay in financials given Tesla's precarious balance sheet.

The autonomy opportunity is still not receiving enough credit

  • Autonomy Investor Day recap

    • Generally well received by most sellside analysts and investors

    • Numerous analysts saw disengagements during their live demos but just about all were still impressed nonetheless. Handled complicated situations. Some noted a somewhat rough, jerky ride.

    • Universal skepticism around timeline, primarily due to regulatory issues, but some skepticism also around capabilities

    • LIDAR vs. vision-only debate still going on. Numerous bears cite AI experts that say that LIDAR is necessary to provide sensor redundancy, especially for edge case scenarios

  • I view the autonomy race in a couple different frameworks:

    • The tradeoff that Tesla made was to get more data from cars in exchange for less sensor redundancy. Was it worth it? Tesla clearly sees the former being significantly more valuable than the latter, but it’s unclear if you can achieve the safety level necessary from vision alone.

    • Another way to frame it comes from Ben Evans. Will LIDAR get cheaper faster than vision gets better?

    • I don't know the exact answer to this, but I would respond with a third question: If LIDAR DOES get cheaper faster than vision gets better, what does that environment look like? Couldn't Tesla just buy the now-cheap LIDAR sensors and retrofit them on vehicles, if necessary? Training a neural net (NN) with an additional sensor (and a massive fleet that can be used to train the NN) seems like a doable thing.

    • Finally, I'd ask a fourth question as well, while we're getting crazy with questions: If the opposite happens, and vision gets better faster than LIDAR gets cheaper, then what happens to the others? They may have to rethink their LIDAR strategy, and begin training a neural net without the LIDAR "crutch" and without the massive fleet. This seems like a harder challenge than what Tesla would face in the opposite scenario.

  • My prior article's views on the autonomy opportunity remain for Tesla today. And while the autonomy day was a large step in educating investors on what's going on, I still believe that this is a potential opportunity that is not being fully priced in to the stock or well understood by the street. Numerous notes put out by equity research analysts continue to cite disengagement data, which has been shown by many industry experts to be unreliable.  

Note that reasonable people can disagree here, so long as they recognize that there are compelling arguments on both sides. I hate that I have to say this, but I think it's necessary with Tesla's rabid bulls and bears. This isn't a battle between two tribes. It's a debate about an uncertain future that none of us have the answers to.