Update: as of Wednesday, March 18th, Tesla is continuing operations at Fremont, we believe at about 25% capacity. We continue to believe that the company will eventually have to shut down the factory altogether apart from “minimum basic operations” to comply with the shelter-in-place order issued by the county. For now, however, internal emails say that Tesla is receiving “conflicting guidance from different levels of government,” and will move forward with a modified workforce and time-off policy. See more here.
This seemingly imprudent push to remain operational begs the question of why? We argue that for Elon, it’s not about saving the top line from a bigger hit – Tesla has the money to weather the storm – it’s a principle of his that defines his companies and endeavors. Musk wants to do when others are hesitant. It reminds us of when The Boring Company was told it would take a year to receive a permit to dig under LA, so they cleared the SpaceX parking lot and began digging on their own land that day, or constructing a tent to expand Model 3 production. When this strange period is over the Tesla spirit will continue, and we expect the company’s delivery growth to outpace other automakers.
Tesla’s Fremont production facility will likely be shut down at the order of the Alameda County Health Officer. We see this as a dramatic but temporary shock to Tesla’s production that will ultimately have little impact on the company’s long-term outlook.
Tesla is now well-capitalized and not at risk of running out of money. More importantly, a Fremont shutdown does not change the undeniable truth that the future of mobility will be electric and autonomous and Tesla holds a strong leadership position.
Tesla Can Weather This Storm
Two years ago, during the Model 3 ramp, Tesla was at risk of running out of cash with only $2.5B in the bank. Today, a temporary production shutdown, even one followed by a material decline in global demand for new cars, does not put the company at risk of running out of money.
Tesla’s balance sheet is strong enough to weather multiple quarters of a Fremont shutdown. In February, Tesla raised $2.3B in cash, which brought the cash position at the time to around $8.6B. The magnitude of the quarterly cash burn with no Fremont production is difficult to predict. That said, since manufacturing cars has high variable costs related to components and labor, the cash burn will be modest relative to the immediate drop in production.
Deliveries Will Miss Our 2020 Prediction and Exceed the Auto Industry Growth Rate
Given the cascading unknowns, the company will undoubtedly fall short of our December 2019 prediction that Tesla will exceed Street deliveries estimate of 463k in 2020, up 28% from 2019. We’re holding off on updating our delivery estimate at this time.
Investors should shift focus from an absolute production number to a market share number for 2020. We continue to believe that Tesla will outpace the broader auto industry’s delivery growth rate by 25 to 30 percentage points in 2020. In other words, if the auto industry is down 20% in 2020, we expect Tesla deliveries to be up 5-10%.
With a more optimistic view that the world returns to normal in 2021, we believe Tesla could return to a delivery growth rate of 30%, driven by growth in electric and autonomous vehicles.