10 Sep

Tesla Might Have Bad News for Bears and Rivals

WRITTEN BY Mohit Oberoi, CFA
  • According to Bloomberg, Tesla has applied for a permit that hints at a new assembly line at its Fremont facility.
  • Some Tesla bears have recently flagged demand concerns. The company has always said that it’s supply constrained and not demand constrained.
  • Nonetheless, when it comes to price action, the bears are winning the argument. Tesla stock is down more than 30% this year. General Motors and Ford have gained 22.0% and 30.8%, respectively, year-to-date.

Tesla

On September 9, Bloomberg reported that Tesla (TSLA) had filed a permit called “GA5 demo and rough grading,” where “GA” stands for “general assembly.” Bloomberg said that the permit filing suggests the company could be planning to add another assembly line at its Fremont facility. Currently, Tesla only has one assembly line at Fremont. In the past, some have criticized TSLA for producing cars in what looked like makeshift tents.

Demand concerns

Recently, Highbridge Capital Management flagged concerns over Tesla cars’ US demand. Citing August electric vehicle sales estimates released by InsideEVs, it said that Tesla Model 3 demand is weakening. Some other bearish analysts have also raised doubts about whether Tesla can maintain its high growth trajectory.

Tesla’s car deliveries have been growing at an impressive pace. Its global car deliveries rose a whopping 134% YoY (year-over-year) in the second quarter. It expects to deliver between 360,000 and 400,000 cars this year. It delivered 245,240 cars last year. Even at the lower end of its guidance, Tesla’s car deliveries could increase by almost 47% YoY this year.

Tesla bears

If the company indeed goes for a new assembly line, it would help answer critics who have cited demand concerns. Furthermore, it’s been on an international expansion spree and has launched the Model 3 in several new countries this year. In addition, Tesla’s China Gigafactory looks on track to begin production by the end of this year.

During the company’s second-quarter earnings call, CEO Elon Musk also talked about production ramp-up. He said that Model Y production preparation has already started. He also said that the Model Y’s ramp-up should be quick due to its high level of component overlap with the Model 3. Tesla faced several challenges related to the Model 3’s ramp-up.

During the company’s second-quarter earnings call, Musk also expressed optimism that it would hit a production milestone of 10,000 cars per week at Fremont by the end of this year. This result would translate into an annual run rate of a little over half a million.

Musk’s remarks

We should always take Musk’s projections with a grain of salt—even Tesla bulls would agree. The company has missed deadlines and projections on more than one occasion. However, its cars are getting a good response in overseas markets and are already among the best-selling models in several countries. Previously, there were reports that Tesla was planning to hire more people as it ramped up its operations. Its sales are increasing at a time when overall car sales have stagnated globally.

Tesla’s sales volumes

Tesla’s sales volumes are at an inflection point right now. Once the company achieves an annual run rate of more than 1 million cars, markets could see it as a strong challenger to established car companies. Its China Gigafactory and its proposed Gigafactory in Europe should also help it ramp up its production. Add its upcoming Model Y, pickup truck, and semitruck, and Tesla will exist pretty much across the automotive spectrum within the next few years.

Mind the losses, though

While Tesla’s volumes have been expanding, so have its losses. Despite record deliveries, the company posted a net loss in the second quarter. So far, strong top line growth has helped Tesla keep the bulls in good spirits. However, somewhere down the line, the company will have to show sustainable profits.

TSLA is having a terrible year so far. Based on yesterday’s closing price, the stock is down more than 30% YTD (year-to-date). Interestingly, established automakers are having a strong year. Ford (F) and General Motors (GM) have gained 30.8% and 22%, respectively, YTD.

Meanwhile, making fun of gasoline cars looks like Tesla’s new favorite pastime. Read Tesla Favorite Pastime? Slamming Gasoline Cars for more info.

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