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Morningstar | 1Q Deliveries Show Why Tesla Needs to Expand Capacity to Grow

Tesla's stock fell over 8% the morning of April 4 after an April 3 evening disclosure of first-quarter deliveries of about 63,000, which significantly missed market expectations of about 76,000. Total deliveries versus the fourth quarter fell 31%, with Model 3 sales down 19.7% and combined Model S and X deliveries down 56.2%. We are not changing our fair value estimate because for now we are giving Tesla the benefit of the doubt that the first-quarter numbers were a function of delivery problems introducing the Model 3 to Europe and China rather than a demand shortfall. Tesla said in its fourth-quarter earnings release Jan. 30 that first-quarter deliveries would be lower than production by about 10,000 units. The actual delivery shortfall versus production came in at about 14,000, but one quarter's numbers to us is not a reason to panic. What really matters is what will Tesla look like years and decades from now. We think any one quarter is not material to that determination, and we think the media give too much attention to quarterly deliveries.

One reason we believe it's too early to say there is a demand problem is that Tesla had about 10,600 vehicles in transit at the end of first quarter compared with only 2,906 at the end of the fourth quarter. That does not suggest a demand problem to us. Tesla said its North American Model 3 inventories are only at about two weeks, whereas a rough rule of thumb in autos for adequacy is a 60-day supply. Eventually, Tesla will need more capacity so it can serve all markets simultaneously as opposed to prioritizing certain geographic markets for a quarter, but it's a young company and needs more time.

The Models S and X are on the older side, so we expect more soft numbers for them in 2019, but we expect a strong year for the Model 3 provided that Tesla can make and deliver the cars and the economy holds up. With about 60% of fourth-quarter trade-ins coming from nonpremium vehicles, we think there is strong demand for the Model 3. Demand for the sedan must stay strong through 2020, however, because the firm's next high-volume vehicle is likely the Model Y crossover, which is not starting deliveries until late 2020. Keeping demand robust for nearly two more years is likely to be a challenge, in our opinion.