Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

When a stock fails to react to positive news/announcement, that means whatever positive the news/announcement contains is already priced in.  In fact, when shares fall on what has been hyped to be a positive, it means that there are other negatives at play.It was abundantly clear on Monday following the company's quarterly production and sales announcement that the markets were concerned about a) sustainability of the 5,000 unit production/week given "tent production" and chief engineer Doug Field's departure.  Here is a brief synopsis of our thoughts on the stock at this point:<ul>
<li>5,000 production/week target has been digested by the market as an achievable goal</li>
<li>Profitability remains a question mark based on market reaction to the goal attainment announcement so the next milestone for the shares will come at the 2Q earnings announcement as to what the cost of goal attainment was (date has not yet been set but expect early August).</li>
<li>Less importantly, it would seem that the departure of Doug Fields has not been well taken by the market but in our view it needs to be watched very closely whether his replacement will be another Silicon Valley veteran or whether s/he will hail from Detroit.  This will be a critical point that many Tesla analysts with IT backgrounds are likely to under-appreciate in our view.</li>
</ul>Perhaps most importantly, consensus sellside research has not focused on the ageing product lines and falling sales momentum which we have been noting (see <a href="https://www.smartkarma.com/insights/tesla-a-few-thoughts-on-ageing-products-before-2q-earnings-announcement" target="_blank" data-smartkarma-citation="insights:19285">Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement</a> and chart below).  This is an ongoing problem with Tesla, in our view, as non-turnover of ageing products is one of the most important outcomes of the company's cash strapped position.  While short term production related cash problems have been well covered by conventional research, the long term effect on product development is something that conventional sellside research has continued to disregard.  In the automotive industry, this is like approaching 18 months with the iPhoneX without having a replacement product in the pipeline in the handset market.At the same time, we have also been noting on the Smartkarma platform that calling Tesla's share price is tantamount to calling the market in the short run.  In the long run we believe fundamentals, whether positive or negative, will get priced in and time will tell whether management can overcome the company's formidable strategic headwinds.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/056/671/original/Tesla%20Valuation%20Table%202018%2007%2003.JPG?1530579133" class="editor-image img-responsive" data-smartkarma-image-id="56671"></figure><div class="content-caption">Source: S&amp;P Capital IQ Consensus Estimates</div>

When a stock fails to react to positive news/announcement, that means whatever positive the news/announcement contains is already priced in.  In fact, when shares fall on what has been hyped to be a positive, it means that there are other negatives at play.It was abundantly clear on Monday following the company's quarterly production and sales announcement that the markets were concerned about a) sustainability of the 5,000 unit production/week given "tent production" and chief engineer Doug Field's departure.  Here is a brief synopsis of our thoughts on the stock at this point:
5,000 production/week target has been digested by the market as an achievable goal
Profitability remains a question mark based on market reaction to the goal attainment announcement so the next milestone for the shares will come at the 2Q earnings announcement as to what the cost of goal attainment was (date has not yet been set but expect early August).
Less importantly, it would seem that the departure of Doug Fields has not been well taken by the market but in our view it needs to be watched very closely whether his replacement will be another Silicon Valley veteran or whether s/he will hail from Detroit.  This will be a critical point that many Tesla analysts with IT backgrounds are likely to under-appreciate in our view.
Perhaps most importantly, consensus sellside research has not focused on the ageing product lines and falling sales momentum which we have been noting (see Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement and chart below).  This is an ongoing problem with Tesla, in our view, as non-turnover of ageing products is one of the most important outcomes of the company's cash strapped position.  While short term production related cash problems have been well covered by conventional research, the long term effect on product development is something that conventional sellside research has continued to disregard.  In the automotive industry, this is like approaching 18 months with the iPhoneX without having a replacement product in the pipeline in the handset market.At the same time, we have also been noting on the Smartkarma platform that calling Tesla's share price is tantamount to calling the market in the short run.  In the long run we believe fundamentals, whether positive or negative, will get priced in and time will tell whether management can overcome the company's formidable strategic headwinds.Source: S&amp;P Capital IQ Consensus Estimates

Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall