“In many ways, the third quarter of 2020 was a milestone quarter (RECORD QUARTER)”, Tesla said at the beginning of its earnings report. Although the company’s stock price has been volatile of late, Tesla delivered a good report in terms of profitability, production and sales figures. Especially on the cash front, Tesla’s free cash flow reached $1.4 billion in the third quarter, a huge 235% increase from the previous quarter.
However, Tesla will face a bigger challenge in the fourth quarter. In its Q3 report, Tesla made it clear that it will maintain its plan to deliver 500,000 vehicles per year, “although achieving that goal has become more difficult”. According to this calculation, Tesla still needs to deliver 180,000 vehicles this year.
From the capital markets again, as of the close of trading on October 23, U.S. time, Tesla shares closed at 425.79/share, with a latest market capitalization of $396.7 billion. Many market views believe that Tesla’s valuation has been in the bubble range, out of touch with the fundamentals. In the future, it is still unknown whether Tesla can maintain its current market capitalization or even continue to move upward.
Will the fourth quarter delivery target be met?
October 21, the U.S. time, Tesla announced third-quarter revenue of 8.77 billion, net profit of $331 million, Tesla five consecutive quarters of profit. Affected by the earnings news, 21 after hours, Tesla shares rose more than 3%, the total market value of more than $ 390 billion.
From July to September this year, Tesla produced a total of 145,000 electric vehicles, the number of deliveries reached 139,000. In China, Data Vision’s data shows that Tesla’s domestic insurance volume reached 36,000 units in the third quarter, accounting for about a quarter of the global market deliveries.
To deliver 180,000 vehicles globally in the fourth quarter, according to Tesla, increasing Model Y production and sales levels and factory capacity in Shanghai is key. Will that goal be achieved?
The Model Y is Tesla’s all-electric mid-size SUV, which is essentially an “enlarged version” of the Model 3, optimized in terms of interior space and hardware systems. Analysts Cross-Sell data show that in the third quarter of this year, the Model Y registration in Tesla’s home base – California has exceeded the Model 3, the market acceptance of the initial verification.
Will Tesla fall below 200,000? Frequent price cuts known as streetcars, targeting another 180,000 units to be sold within the year
However, some analysts believe that the main factor driving Tesla’s sales growth is in China. As far as the Chinese market is concerned, the time for the Model Y to go into production will also depend on the construction progress of the second phase of Tesla’s Shanghai factory project. Recently, the second phase of the project has passed the phase review and is expected to go into production in the first quarter of 2021. This means that the Model 3 will remain the mainstay of Tesla’s Chinese market in the short term, and also carries the burden of bringing in volume and maintaining profit margins.
This is the core reason why the domestic Model 3 price is so “volatile”. This year, the domestic Model 3 standard range upgrade, which accounts for nearly 90% of deliveries in China, has undergone three rounds of price adjustments, first from 358,800 yuan to 323,800 yuan in January, and then to 291,800 yuan in May due to the new subsidy policy.
At the beginning of the new fiscal quarter on October 1, Tesla once again lowered the domestic Model 3 standard range upgrade to 249,900 yuan, this round of price cuts to make the Model 3 into the 200-250,000 yuan price range, is also considered to be the performance of the end of the year rush. The analysis of Ping An Securities said that the standard range-extended version of the sales accounted for more sales, and the price cut will help attract price-sensitive consumers, which will effectively stimulate sales growth.
200,000 is the Model 3 price bottom line?
After multiple price increases, will Tesla hope to deliver another 180,000 units and continue to cut prices?
According to the trend of localization of the supply chain, Tesla does exist price reduction space, Societe Generale Securities previously analyzed that the gross margin of the domestic Model 3 is significantly higher than the U.S.-made Model 3, and production costs are more than 20% lower than the U.S. version. According to the biggest price cut given by Societe Generale Securities, the domestic Model 3 price may be lowered to below $200,000.
But from the brand’s price bottom line and consumers’ feedback on Tesla’s repeated price cuts, it’s still unclear whether the price will really break through 200,000. Ping An Securities believes that 200,000 files or brand price bottom line, to develop a larger market need to start from the price, but also to take into account the brand image. For the Model 3, a light and extravagant positioning of the popular models, the price of 200,000 yuan and above will be the appropriate range.
In addition, Tesla is likely to launch a more low-end model in the future, and the Model 3 occupies a different price range.In 2018, Musk has said in an interview that Tesla will definitely launch a $25,000 product, and plans to land within three years.
It should also be noted that while the price for volume has ensured a certain level of deliveries and starts, pushing Tesla to maintain margins at a reasonable level and guaranteeing financial figures. However, the frequent price changes were not friendly enough for Tesla users, especially the older ones. After several price cuts, the topic of “Tesla price cuts” has become a fixed slot in social media.
After the controversial price cut on October 1, a netizen recently said on a social media platform that the “domestic Model 3 will drop to 199,000 yuan,” causing a huge uproar. Many people are dissatisfied with the “Tesla price cut”, and even repeatedly voiced that Tesla “is a street car” in the market.
Tesla old owners have different feelings about the price reduction. Some owners think that the price cut harmed the interests of old users, and even plan to sue Tesla; Some owners said they can understand the price move, but think that Tesla can better communicate with users, do not let every price cut become a target.
Why did Tesla’s price cut cause such a big ripple? In fact, Tesla replaces the “traditional car company – dealer” relationship chain through direct sales channels. As there is no dealer to do price adjustment, consumers will be more intuitive to feel the price change, which makes it easier for early purchase owners to feel “cut leek”, also let the owner of the Tesla brand value question.
Take the aforementioned “down to 199,000 yuan” rumor as an example, although Tesla later firmly denied the news, but this incident reflects the user’s concern about Tesla’s price volatility, Tesla’s public relations image is beginning to appear cracks.
All in all, Tesla needs to improve not only its production capacity, but also how to capture users and how to communicate with them properly if it hopes to meet its delivery target in the fourth quarter.
How long will the valuation bubble last?
Even more volatile than the selling price was Tesla’s stock price. Unlike the year-over-year increase in production and sales figures, Tesla stock suffered a huge shock in the third quarter.
At the end of August, Tesla shares once hit a high of $498 per share, with a market capitalization of more than $400 billion.
However, after hitting $498, Tesla shares continued to fall in early September. Among them, Tesla on September 9, a one-day plunge of more than 20%, the largest daily drop in history. The market generally believed that the decline in Tesla’s stock failed to be selected by the S&P 500 index. It is worth mentioning that this round of decline made many short-sighted Tesla hedge funds finally turned a profit.
It’s also worth noting that Tesla shares fell on the day of Tesla Battery Day, the release of third-quarter delivery data and other landmark timelines. The former is due to Tesla’s new battery plans not getting off the ground in the near future; the latter shows that Tesla’s valuation is in bubble territory and out of sync with its fundamentals.
Innovation and brand power have given Tesla the valuation positioning of both a technology company and an automotive company, which has caused Tesla’s stock price to soar this year. But some analysts believe that Tesla’s current valuation should be in the $200 billion range based on business alone. The valuation bubble comes from Tesla’s impact on traditional car companies, as well as Musk’s very distinctive personal value.
Today, analysts are divided on Tesla this stock. Deutsche Bank recently upgraded Tesla’s rating to “buy”, and said that the United States election in November or lead to the Tesla stock price after the election volatility. In the long term, Deutsche Bank will Tesla target price positioning $500 / share, and gave a 2025 sales of 2 million units of high expectations.
Another group of analysts adhere to the Tesla valuation has been out of touch with the fundamentals of the view Needham analyst Rajvindra Gill recently said that the Tesla share price trend is too extreme, it is difficult to continue to rise in the future. Based on this, the analyst will adjust the Tesla rating to “lag the market”, and said that even if Tesla sales continue to grow in the next few years, at the current valuation, Tesla is also difficult to show its “stable profitability”.