About a week ago, a Wall Street analyst provided a worrying report that signaled that Tesla Motors Inc (NASDAQ:TSLA) might finally have fallen victim to Porter’s Five Forces. According to a note on Tesla stock by Pacific Crest analyst Brad Erickson, TSLA was possibly using ”aggressive discounting” mechanisms in a bid to hit third-quarter and 2016 delivery targets. This runs contrary to the company’s long-standing policy of not offering discounts.
According to Erickson, Tesla had been using various discounting mechanisms, including using a deeper discounting formula, to drive sales of its more expensive models in the face of slowing demand. The analyst warned that Model S was seeing soft demand, and that as much as a third of Model S sales during Q3 came from customers who had made reservations for the Model 3.
Erickson also added that Tesla was likely to report Q3 deliveries in-line with his 22,000-unit estimate. However, he warned that stronger demand for the cheaper 60kWh Model S trim could hit Tesla’s gross margin by a huge 1,000 basis points during the third quarter.
That was bad news for Tesla stock, which has been weighed down largely by concerns over TSLA’s ability to meet lofty 2016 delivery goals.
Pricing Pressure for Tesla Motors?
Erickson’s claims about Tesla’s discounting practices border on the sensational. TSLA has always maintained that its vehicles are production constrained, and that the company faces a perennial problem where demand for its EVs always outstrips supply.
In other words, according to Tesla, its vehicles have been flying off its showrooms faster than the company can manufacturer them. The analysts claims to have come up with these findings after talking with 20 Tesla U.S. sales centers, though, so they do have some credibility.
It hardly came as a surprise that Tesla CEO Elon Musk came out the following day with ”corrective action” in the form of a missive sent out to Tesla employees, saying:
“It is absolutely vital that we adhere to the no negotiation and no discount policy that has been true since we first started taking orders 10 years ago.”
Noteworthy is the fact that Musk did not refute the existence of a discounting mechanism at his company. He merely claimed that it was limited to a small number of vehicles.
Just what constitutes ”small” is anyone’s guess.
Tesla Reports Impressive Q3 Deliveries
Just as well, though. Tesla just released impressive Q3 delivery numbers, and they clobbered Erickson’s estimate of 22,000 units. Tesla said it delivered 24,500 units during the third quarter, exceeding the consensus on Wall Street. Those deliveries comprised of 15,800 Model S units and 8,700 Model X SUVs. That’s good for a remarkable 70% sequential increase, and robust 111% year-over-year growth.
The news sent Tesla stock up almost 5% on Monday.
TSLA also reiterated its goal to deliver 50,000 vehicles during the second half of calendar 2016, which implies the company expects to deliver at least 25,500 vehicles during the final quarter of the year. Tesla claimed it can manage to hit this ambitious goal because it was conservative in reporting its Q3 numbers.
Tesla will report third-quarter earnings on Nov. 1, so investors won’t be able to verify the gross margin erosion claim by Erickson till then. A margin contraction of 10 percentage points, though, would almost guarantee a bloodbath for Tesla stock. Tesla has missed earnings estimates on the past four quarters running, so that’s a short-term risk for Tesla stock.
Should You Worry About Tesla Stock?
But do long-term investors have anything to fear regarding the discounts and claims that the company was potentially cannibalizing future Model 3 sales? Probably not. It’s quite possible that people who otherwise would have purchased a Model S are holding off their purchases in anticipation of the first batch of Model 3 deliveries in 2017. This could result in soft demand in the near-term, forcing TSLA to discount its products to entice customers to buy.
On the flip side, it’s also possible that some customers who had made Model 3 reservations got tired of the long wait and decided to purchase a Model S instead, as per Erickson’s claims.
In any case, it’s far better that those customers chose to purchase Tesla’s more expensive products than, say, if they had chosen to buy a Chevy Bolt from General Motors Company (NYSE:GM). The first Bolt EVs will become available later in the year, giving GM a head start of several months over Tesla’s Model 3s.
That confirms Tesla’s brand power, which is always a good thing.
We do not yet have the full picture of what’s going on behind the scenes to come up with a reasonable prediction of how things are likely to pan out for Tesla stock. But what we do know is that Tesla seems to be on course to meet its full-year delivery target of 80,000 units.
This eliminates a lot of short-term risk for Tesla stock.
