Tesla 3 Will Be Late And Make No Money, Says Analyst.
Not So Says Another, As The Company Spooks Investors.
“I strongly support the thesis that Tesla will be the greatest success story in automotive history”
Tesla Inc’s Model 3, scheduled for launch later this year, will be late, never make any money, and quickly be over-taken by German competitors.
Not everyone agrees, and one German professor says Tesla will be the biggest success in automotive history.
Bernstein Research analyst Max Warburton said Tesla won’t be the great disruptor of the traditional industry suggested by the conventional wisdom, not least because its technology is widely available.
The fact the Germans aren’t rushing to match the Model 3, shows demand probably won’t be great either. When the Germans, and others, do match Tesla’s products, the quality is likely to be much better too.
Warburton’s negative remarks were published in a report alongside those of a colleague who made the case for Tesla. Bernstein’s U.S. IT Hardware and Electric Vehicles analyst Toni Sacconaghi begged to differ, saying Tesla is indeed disruptive.
This will happen quickly because EV (electric vehicle) adoption will be huge. Tesla’s first mover advantage and brand power should enable it to gain market share.
Tesla will be much more profitable than traditional auto manufacturers.
“Tesla has a unique growth profile and has reasonable valuation in light of its tremendous option value,” Sacconaghi said.
100 per cent market share and no profit
Warburton said Tesla identified a new segment – long-range premium EVs – but 4 years later and with 100 per cent share of the segment it is still losing money.
“Tesla is not a disruptive company. It has not significantly impacted the conventional auto industry, it is not moving fast enough to pressure incumbents, and it has not invented a product that is cost-competitive with typical automobiles,” Warburton said.
Tesla’s core business is not cash generative, it has no clear technology edge in batteries or autonomous driving, and it is about to face multiple EV competitors from Europe for the Model S and Model X.
Model 3 will be late and won’t be profitable, Warburton said.
Tesla continues to lose money and threatens to need more, but the stock price persists in surging higher. In the first quarter, Tesla’s net loss widened 17 per cent to $330 million compared with the same period of 2016 as sales more than doubled to $2.7 billion. Tesla raised just over $1 billion from shareholders in March to help fund Model 3 production, and this is unlikely to be the last call on their pockets.
The Model 3 is likely to be priced close to $35,000 but probably averaging closer to $45,000. Morgan Stanley, in a recent report, predicted only 2,000 Model 3s will be delivered this year, and 90,000 next year, which is less than half its forecast three months ago.
Tesla has said Model 3 production will reach an annual rate of over 500,000 sometime in 2018. Tesla has also said overall production – Model S, Model X and 3 – will reach 500,000 in 2018 with a goal of 1 million by 2020. The 1 million target assumes the addition of the Model Y, a compact SUV, in late 2019 or 2020.
Not nearly attainable
Morgan Stanley thinks this is not even nearly attainable and forecasts Tesla will reach 500,000 Model 3 deliveries no earlier than 2024.
Investment researcher Evercore ISI in a recent report is more optimistic than Morgan Stanley, expecting 280,000 Model 3 deliveries in 2018 and reckoning Tesla will reach an annual rate of 500,000 at the end of 2019.
Warburton doesn’t think Tesla’s finances add up.
“Just looking at its (Tesla) financials and cost of doing business – I think it’s pretty terrifying, and I struggle profoundly to understand Tesla’s valuation and what people are expecting this company to be. I simply struggle to see how making EVs is a commercially attractive activity,” Warburton said.
Warburton said traditional auto companies wonder why they should try to emulate Tesla, not least because even though current products sell for about $100,000 and up, it seems to make 20 to 25 per cent gross margins, while top end German luxury cars make around 50 per cent gross margins.
He said Tesla is an irritant, rather than a disruptor.
If the Model 3 does sell in big numbers, this will put huge pressure on an already tottering service network, if the British operation is typical.
“The sales and service network, at least in the U.K., cannot deal with the current cars (Model S and Model X) because they have so many problems. I do not have any idea how Tesla is going to deal with rolling out Model 3 and frankly, everyone I’ve spoken to at Tesla in the U.K. has no idea how they’re going to deal with it either.
In fact, lots of them are going to leave before Model 3 launches because it’s just too stressful working there. If Model 3 quality is as poor, the service network is going to face major problems,” Warburton said.
Warburton owns a Tesla, but didn’t say which model.
“There are things I like about (my Tesla) but it is actually quite a hassle to run compared to a gasoline car. Range is a limitation even with a battery that size. The quality is crap and I think in terms of value for money, it doesn’t really stack up. Yes, it’s very sexy and everyone loves it, but I don’t think it’s a rational purchase for one second,” he said.
“Tesla’s taking a huge risk and sitting on big potential liabilities. Eight year battery guarantees, vehicle residual guarantees, enhanced autopilot commitments, and all sorts of risks it’s planning to take with further early stage Autonomous technology. I mean it just scares the hell out of me, but maybe that’s because I just cover the European Autos sector,” he said.
So who is right?
Professor Ferdinand Dudenhoeffer, director of the University of Duisberg-Essen’s Center for Automotive Research, plumps for Tesla.
“I strongly support the thesis that Tesla will be the greatest success story in automotive history. (Tesla CEO) Elon Musk defines the new rules of the game and all the others will have to follow him. Tesla’s lead in EVs and autonomous cars will provide dynamic growth and he is also ahead with the charging network, batteries and also modernizing the retail system. I’m pretty sure model 3 will be a success and with Model Y in 5 to 7 years Tesla will have annual sales of 1 million or more.
Why isn’t there a German rival to the Model 3? Is it because they don’t see a market for a car of this size?
“No. This because they are late in starting. the problem is the Germans are too late and too slow compared with Elon Musk,” he said.