Our long-term confidence in the Tesla story is unchanged. What’s new is our belief that the next year will bring more challenges than we had expected. If accurate, this will weigh on shares of TSLA. Previously, we had felt that Sep-18 and Dec-18 were an indication of the business stabilizing, but it’s becoming more apparent that the company continues to have many moving parts. Any lumpiness in the story will give momentum to the view that Tesla will run out of money. We believe Tesla will survive because we expect the company can continue to raise money based on their lead in undeniable long-term growth opportunities including EVs, autonomy, and renewable energy. Here are our swing factors:

• Vehicles in transit. We believe Mar-19 deliveries are a wildcard based on Europe and China transit times. Business Insider reported an internal email citing Tesla’s Sanjay Shah asking employees to help deliver 30,000 cars in the last 15 days of the quarter. This could cause a material 10-15k swing in March deliveries. We believe the demand exists to meet our 83k vehicle delivery estimate, but, based on logistic troubles, the delivery number could be meaningfully lower. For Mar-19 we’re expecting deliveries of 61,365 Model 3, vs. 63,359 in Dec-18 and 21,379 S&X vs. 27,607 in Dec-18.
• Demand. The June and September quarters will likely be more of a challenge because demand may dip due to EV macro forces. While there has been long-standing EV adoption concern, the pent up demand for the Model 3 over the past year has likely masked these factors’ impact on demand. In other words, the Model 3 has pulled forward EV early adopters, and demand is again being affected by the usual apprehensions around range anxiety and charging ability. To illustrate how early EV adoption is, in 2018 EV’s accounted for about 2% of the cars in the US. Less demand would pressure cash and strengthen the case that the company must raise capital.
• Profitability. Profitability could be impacted by increased costs of working out logistics challenges in delivering vehicles to China and Europe. Our Jun-19 loss goes to $600m (similar to Mar-19) from $524m, and our Sep-19 estimate goes to a $298m loss from a profit of $52m. We expect a small profit in the December quarter. See our updated model here.
• Raising money. Tesla’s last public comments were that they do not believe raising money will be necessary. We believe it’s in the best interest of the company to raise money and therefore believe a raise is likely in 2019. Importantly, we believe Tesla can raise money, but likely at a discount to where the stock would be trading at the time of the raise. Also, the company has had some recent success in raising money with $520m in new debt last month from four Chinese banks for the Shanghai Gigafactory at about a 4% interest rate.

Long-term View Intact

We continue to believe that over the long-term Tesla will prosper and patient shareholders will be rewarded. The electrification of vehicles is undeniable, and Tesla’s participation in that EV future is crucial given its leading family of vehicles along with optionality around energy capture/storage products and autonomous driving.

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