Does Tesla's Delivery Failure Warrant a 10% Haircut?

There’s an old saying that an army travels on its stomach. Refreshed for the modern business world, the catchphrase might be something like, “It’s the logistics, stupid.” And it was logistics that tripped up Tesla Inc. (NASDAQ: TSLA) in the first quarter of this year.

The company reported that deliveries of its all-electric vehicles fell short of fourth-quarter 2018 deliveries by 31%. Tesla delivered 63,000 vehicles in the quarter, compared to a consensus expectation of 75,000 vehicles. The shortfall was particularly great for the Model S and Model X, which combined for deliveries of 12,000 units against expectations for 20,000 deliveries.

Gene Munster and Will Thompson of Loup Ventures attribute the shortfall to reallocating resources from the Model S and Model X to Tesla’s bread-and-butter Model 3. The problem was that the company produced 11,000 fewer of the more expensive models in return for just over 1,500 cheaper Model 3s. Tesla delivered 50,900 Model 3 sedans in the first quarter and a combined 12,100 Models S and X.

In its announcement, Tesla noted that it only builds cars in Fremont, California, for delivery all over the world. As a result, first-quarter production of about 77,000 vehicles exceeded by 22% the number of vehicles the company was able to deliver in the quarter:

Due to a massive increase in deliveries in Europe and China, which at times exceeded 5x that of prior peak delivery levels, and many challenges encountered for the first time, we had only delivered half of the entire quarter’s numbers by March 21, ten days before end of quarter. This caused a large number of vehicle deliveries to shift to the second quarter. At the end of the first quarter, approximately 10,600 vehicles were in transit to customers globally.

Even if every vehicle in transit had been delivered, however, the number of deliveries would have risen to only 73,500, closer to but still short of expectations. And given the logistical headaches that led to Tesla’s inability to ship more than 10,000 finished vehicles, how does the company plan to deliver 99,000 vehicles per quarter for the rest of the year to meet its reaffirmed guidance of 360,000 to 400,000 deliveries in 2019?

Tesla also made some pricing adjustments during the quarter related to the halving of the federal incentive to buyers from $7,500 to $3,750. Beginning in July the incentive will be cut to $1,875 for the rest of the year before disappearing altogether on January 1, 2020.

Munster and Thompson are sanguine:

The Mar-19 delivery and production numbers have little impact on Tesla’s long-term outlook. We have expected 2019 to be a bumpy year for Tesla. This bumpiness includes continuing to work through production and logistics challenges and finding a baseline for demand as the initial rush of Model 3 buyers subsides. While 2019 will be a challenge for the company, we continue to believe long-term investors will be rewarded. This belief is based on Tesla converting its technology lead into capitalizing on the undeniable trends of electric and autonomous vehicles.

Investors, well-known for their short-term focus, are not so bullish. Tesla’s stock traded down about 9% Thursday morning, at $265.38 in a 52-week range of $247.77 to $387.46. The consensus 12-month price target on the stock is $323.82.

To top it off, CEO Elon Musk’s lawyers will begin defending him today in a New York federal court against a contempt charge brought by the U.S. Securities Exchange Commission for violating an October settlement requiring Musk to clear his tweets with company lawyers before posting.