Tesla reported Q4 production and delivery numbers fractionally (<1%) below Street expectations. Separately, the company announced they have reduced the price of all models in the US by $2,000. These developments are psychological setbacks for investors looking to gain confidence in Tesla production and underlying demand, but the news does not fundamentally change the company’s long-term opportunity related to EV, renewable energy, autonomy, and ridesharing.

• Tesla announced production of 86,555 and deliveries of 90,700 vs. the Street at 91,046 deliveries. Any fractional miss is magnified given investors intense focus on production numbers over the past year.
• The company also announced a $2,000 price cut on all models in the US. We believe this is evidence that demand for Teslas and for EVs more broadly is still tied to incentives, so the step down in the tax credit ($7,500 to $3,750) will, understandably, have an impact on demand. This equates to about a 3% average discount on a Tesla. If Tesla had a demand issue, they would have to discount by more than 3%. To be clear, we are not changing our 2019 unit estimates.
• Upcoming positives for demand in 2019 include introducing lower-priced configurations (for which many reservation holders are still waiting), expanding delivery to and adding more international markets, and offering Model 3 leasing.
• Newly announced competition from Audi, Jaguar, Porsche, and others will likely amount to fractional-at-best units in 2019.
• The transition to electric vehicles remains one of the biggest opportunities in tech. Today about 2% of cars sold are EVs, and over the next 15 years, that number will approach 100%.

As a reminder, Tesla has a $920M note due in March of this year (convertible at $360). We believe the company does have cash on hand and significant cash flow from operations to service the debt, and there is a chance the debt converts if the share price is above $360 on the due date. There is an additional $566M note due in November of 2019, but the conversion price is currently significantly out of the money at $759.

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