Six days ago, news broke that Elon Musk had sent an email to Tesla employees about going all out for the final week of the quarter to ensure a “good outcome.” Since that point, debate has raged by exactly what was meant by that statement. Is Tesla looking to surprise Wall Street, which has been anticipating around 60,000–70,000 total cars moved?
In the Tesla Q1 2020 Earnings Thoughts article I wrote, I noted that I feel “the entire business world should pretty much have a mulligan for Q2 2020,” due to the pandemic and the way its effects will be felt. We’ve learned a lot since that point, and I think that we’re in for a surprise. Let’s do the math.
How Many Cars Produced?
To start on the delivery numbers, we need to determine how many cars were produced. Tesla’s Fremont factory was shut down on March 24th — for the purposes of Q2 analysis, this counts as April 1 — until May 11th. There are 91 days in Q2, so this gives us 51 days the factory was open, or a hair more than 56% of the time. For ease, I’m going to do my calculations using 56% as the number.
In Tesla’s Q4 2019 results, they shared current installed capacity at Fremont of 400,000 Model 3 / Y vehicles (with an expected transition to 500,000 by mid-2020) and 90,000 Model S / X vehicles. They claimed to have made 105,000 vehicles during this time.
Let’s start with a best-case scenario. In this version, Tesla used the downtime to upgrade Fremont, bringing it to its full capacity of 590,000 per year. This means Fremont could now produce 147,500 vehicles in a quarter. If we assume that Tesla was at full capacity from the moment it opened (remember, this is a best-case scenario), Tesla could produce 82,600 vehicles. The math is: (Current Production Capacity + Upgrade Capacity) x Percent of Days Open = Best Case Production Number.
In a worst-case scenario, Tesla made no upgrades to its factory, meaning it still has a 122,500 vehicle capacity per quarter. Full capacity on that would be 68,600, but let’s assume that Tesla had huge difficulties reopening the plant and only achieved a run rate of half that. This makes the worst-case scenario for Fremont 34,300 vehicles. The math is: Current Production Capacity x Percent of Days Open x Half (for production difficulty) = Worst Case Production Number.
So, Fremont has a range of 34,300 to 82,600 vehicles made. I know, these numbers right now sound like a Morgan Stanley bull versus bear case for Tesla share value, but we need a starting spot.
What about Shanghai? Tesla Shanghai’s closures occurred in Q1, so Q2 will not be affected by pandemic closures. At the very beginning of January, Tesla announced in China that they had already achieved a production rate of 3,000 Model 3s per week, matching the installed capacity listed on the slide from its Q4 results above. Breaking this down by day, it gives us a 429 car production rate per day. Because Shanghai spent such little time closed, and Shanghai had confirmed this as its actual run rates, I’m going to use the daily production rate instead of the quarterly one.
China’s workforce takes a five-day Labor Day break, and extended the break by four days to a total of nine. While news media claimed the reason for the stoppage wasn’t immediately clear, those same reports referred to Tesla’s statement that it was using the holiday to conduct production line adjustments.
Let’s start with a worst-case here. Shanghai operates for 82 days with a theoretical run rate of 429 cars per day. That gives us 35,178 vehicles made. But, again, let’s say that it only achieved a run rate of half that. Our worst-case scenario is 17,589 vehicles. The math is: Current Daily Production x Operational Days x Half (for production difficulty) = Worst-Case Production Number.
Best case? There was a rumor that Tesla planned to do a stress test of its facilities in June before it would make a significant increase in its production for the rest of the year. We haven’t heard of this happening, so let’s say it used the time in May to increase capacity to 4,000 per week, or 571 per day. In this case, our best-case scenario is 30 days of production at 429 cars per day, and 571 for 52 days. That would give us a best-case scenario of 42,562 vehicles in the quarter. The math is: (Original Production Capacity x Days at that Capacity) + (Upgraded Production Capacity x Days at that Capacity) = Best-Case Production Number.
Shanghai gives us a 17,589 to 42,562 range for vehicles made.
Combine the two, and in the worst case scenario, we have a combined capacity of 51,889 and a best case scenario of 125,162.
How Many Cars Delivered?
The math for this is relatively straightforward, but we need to combine the production capacity possibilities above with an important piece, which is that in Q1 of 2020, Tesla ended up producing many more cars than it delivered — 102,672 produced versus 88,400 delivered, or a difference of 14,272.
Normally, Tesla’s production and delivery numbers are almost equal. In Q4, Tesla produced 104,891 vehicles and delivered 112,000. In Q3, Tesla produced 96,155 and delivered 97,000. Using this data, it can be reasonably assumed that the majority of the 14,272 vehicles production difference in Q1 were delivered in Q2.
That gives us a worst case scenario of 66,161 vehicle deliveries, and a best case scenario of 139,434 vehicle deliveries.
In case you forgot, at the beginning of the article, I noted Wall Street consensus on Tesla was for the company to deliver between 60,000–70,000 vehicles. I started writing this article when I realized how terrible Tesla production would have to be to actually be that low. It seems pretty obvious to me that we’re going to be at least in the consensus numbers, and I think we’ll be higher. In fact, I’m going to write a follow-up article to this one looking at what more we can discern about where production and delivery actually sits for Q2. Spoiler in case it wasn’t obvious: I think Tesla is going to be above the Wall Street Consensus.
Until then, leave a comment on if I missed anything here, and what you think that Q2 production and delivery might look like.
A Note On My Previous Article
In my recent article about Adam Jonas’s argument that GM’s EV division should be worth $100 billion for some reason, I asked people to comment if they had any idea why Jonas was valuing GM so highly that I missed, and while seemingly no one else had any idea what Jonas was talking about, I thought there was a comment from dbp934 worth responding to regarding my personal belief in stock buybacks, and their point that there are reasons to conduct buybacks other than to prop up share price, including the two that dbp934 mentioned — either to reduce the amount of cash-in-hand so it can’t be borrowed against in case of a hostile takeover, as well as returning cash to the investor by raising the share price and also reducing the effects of stock short sellers.
dbp934 makes a good point that there can be reasons other than just propping up share price to buy back shares. In short, my belief is that dividend increases and even special dividends are a better way for a mature company that is sitting on more cash than it deems to be prudent to use. Dividends take away the mystery of buybacks, such as how many shares are issued compared to bought back, what price the company is paying, and so on.
I hate buybacks because they distort the actual demand for a stock, leading to a potentially massive downside when the buybacks stop, and often companies that buy back stocks reissue new shares anyway. In fact, if you want a crazy math question I remember being raised in this article by Stephen Gandel for Bloomberg in March of 2019: “If the companies in the S&P 500 Index have 289 billion shares outstanding, and they repurchase 82 billion in a decade, how many shares will they have at the end of those 10 years? The answer, of course, is 294 billion, 5 billion more than what they started with.”
Simply put, I want to be able to see the direct benefits in a quantifiable way — like dividends — and not trust the programs will work to deliver value. Some see that differently. I tend to keep a small portfolio, and it allows me to choose not to pick companies that do major stock buybacks.
I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
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