After a painful 2022, which saw its stock drop an eye-watering 65%, Tesla Inc (TSLA, Financial) has been making a bit of a comeback. Since the start of the year, the stock has surged over 125%. While still about 30% shy of its 2022 highwater mark and 40% off its all-time high, Tesla Inc (TSLA) has undeniably climbed out of the doldrums.
Investor Enthusiasm and Reality Check
While Tesla Inc (TSLA, Financial) has rekindled investors’ enthusiasm in recent months, the lofty expectations buoying its stock may soon collide with reality. The electric vehicle maker is set to announce its third-quarter production and deliveries numbers early next month. The Wall Street consensus delivery estimate currently stands at 463,000 units. However, a number of analysts are sounding the alarm, with even some long-time bulls warning the company will fall short of expectations.
Barclays: From Beat to Miss
Barclays analysts entered the third quarter quite bullish on Tesla Inc (TSLA, Financial)’s prospects. At one point, they even predicted delivery numbers for the three months well above the consensus. Barclays appears to have reversed its position in light of recent evidence, however, as revealed in its latest analyst note published Sept. 22:
“We expect 3Q deliveries of 455k units, a miss vs. consensus of 463k, and also below our currently published [estimate] of 483k. Our estimate also implies a q/q decline from 2Q23 of 466k. We believe recent commentary on the pace of production provides some hint on the potential delivery volume in 3Q. Indeed, our delivery estimate is based on a production assumption of ~435k as well [as] an inventory drawdown of 20k…Underscoring our expectation for a slight miss is that demand remains soft. Of course, pricing actions may have helped offset weak demand to some extent, as we saw ongoing price actions in 3Q.”
Barclays had previously predicted deliveries to the tune of 483,000 in the third quarter, 4% above the consensus. Now, the firm’s analysts forecast just 455,000 deliveries, down 6% from its own prior estimate and 2% below the consensus.
Impact of Delivery Miss on Tesla's Growth Narrative
While Barclays is only predicting a relatively small miss in the grand scheme of things, every miss matters when it comes to Tesla Inc (TSLA, Financial)’s all-important growth narrative. Any significant miss on deliveries or earnings threatens its image as an unstoppable growth engine. Thus, the worse-than-expected sequential slowdown from the second quarter, which Barclays now foresees, could weigh on investors.
Price Cuts and Demand
Making matters worse is the fact the third-quarter deliveries slowdown has come in spite of Tesla Inc (TSLA, Financial)’s concerted efforts to juice up demand through price cuts. Heavy discounting on Tesla’s inventory vehicles in the U.S. market, as well as significant price cuts to new vehicles in both the American and Chinese markets, have failed to move the needle as much as some might have hoped. Moreover, discounting also means a lower average sale price for the vehicles it does manage to sell.
NewStreet Research: Brace for a Material Miss
NewStreet Research has also weighed in on the subject of Tesla Inc (TSLA, Financial)’s third-quarter deliveries, releasing its latest investor note on the electric vehicle maker on Sept. 22. The authors, led by well-known Tesla bull Pierre Ferragu, predicted a “material miss” on deliveries, though they were also quick to downplay its significance:
“We believe the miss is well anticipated by both the buyside and retail influencers. The sequential decline results from production pauses at all of Tesla’s factories over the course of the quarter. In Shanghai and Fremont, the transition to Model 3 ‘Highland’ resulted in multiple production pauses…In Texas and Berlin, we understand the pauses were for more routine upgrades to the Model Y production lines. However, underlying demand seems largely stable…We estimate that the factory shutdowns will have a one-off impact of 2.5pts in 3Q23…We are unclear about the impact of further price cuts. As they affect higher-end models, they may reflect in improved mix, but they could result in some pressure as well. Overall, the situation appears stable.”
NewStreet expects Tesla Inc (TSLA, Financial) to manage just 438,000 deliveries in the third quarter, below even Barclays’ revised estimate of 455,000. However, the analysts do not believe such a miss will do much to impact Tesla’s stock in the short run. In fact, NewStreet argues this is already priced in since the various factory shutdowns that have crimped vehicle production during the quarter were well advertised when they occurred.
Impact on Tesla's Earnings
Likewise, NewStreet is sanguine about the impact the delivery shortfall will have on Tesla Inc (TSLA, Financial)’s third-quarter earnings. The analysts do not see the price cuts that took place throughout the quarter as likely to cut into Tesla’s margins overmuch, though they anticipate a marginal decline from the 17.5% gross margin posted in the previous quarter.
Final Thoughts
At the close of the trading day on Sept. 22, Tesla Inc (TSLA, Financial)'s stock stood at just shy of $245. That share price implies a valuation of a staggering $767 billion, far in excess of that of any other automaker, including those with automotive businesses many times larger than Tesla’s own. That is because Tesla’s valuation is not based on its current delivery or earnings numbers, but on its expected future deliveries and earnings. And those expectations are extremely optimistic. Thus, any sign of weakening demand, however small, is a problem. Failure to keep up with the wild optimism of its shareholders could ultimately puncture Tesla Inc (TSLA)’s bubbly valuation.
