Tesla Sales Soaring, Competition Failing

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Summary

In this article I focus on Tesla (TSLA) performance metrics. I will not address sensationalized headlines about tokes, tweets, and suits. I will focus on delivery numbers, graphs, and discussion about the auto market going forward.

In particular I explore the idea that we should expect ICE car sales numbers to crash first, and then later, EV sales figures will grow. This poses a serious threat to legacy auto companies.

Every EV sold removes three or four new ICE car buyers from the auto market.

This first section communicates an idea I’ve been studying.

ICE car sales are down and EV sales are up. Most people know this much. Also, EV sales are not up by as much as ICE car sales are down. The two metrics are believed to be independent of one another. I believe they are related.

When someone purchases a Tesla Model 3, that car sale is an EV and not a new ICE vehicle. So that is a first sale the ICE industry loses.

Next, the new EV owner often trades in a used ICE car and someone else will purchase that car. Some number of car buyers will opt for a nice used car instead of a new car, so this potentially eliminates another new ICE car buyer.

After that, the new EV owner shows off his or her car to friends and family. Many produce YouTube videos about their EV experience. In the end, another couple of friends and family become convinced that their next vehicle will be an EV. All together it is likely that three or four people who would have purchased an ICE car as their next new vehicle will now instead purchase an EV.

If you don’t understand what I’m talking about, here’s one example of a YouTube video where a guy that owns a Model 3 is out, for fun, picking up unsuspecting Uber riders in his new Model 3 to see their reactions.

Toward the end of the video he asks the riders if they would want a Model 3. Nearly all said they “want” or “need” to get a Model 3. Understanding how the Model 3 is converting future car buyers is important in understanding why the ICE new car sales are dropping so quickly. The above video will help you understand this phenomena that’s spreading rapidly through the car buying public.

Let’s begin with an easy to understand graph of how the EV industry is growing. According to Bloomberg New Energy Fund the time needed to sell 1 million EVs in the world has shrunk from six years to six months. The rate of sales of EVs is clearly accelerating.

(Source: Bloomberg NEF)

I estimate that every one EV sale translates into a drop of approximately four ICE car sales. Given that we are now selling about 2 million EVs per year this means there are about 8 million ICE car buyers removed from the new car market each year. This number is growing.

But what’s most important is the fact that when people decide their next car will be an EV, that choice can happen in an instant. Learning about EVs and actually purchasing one of them may take several years.

What this means is that ICE car sales collapse first, and then years later, EV sales will grow. For legacy auto companies this is a disaster. For start-up EV car companies, it’s irrelevant.

Legacy ICE car sales will pay for EV develolpment

Bob Lutz purports that Tesla is headed to the graveyard and that ICE sales profits will fund future EV development and money losing initial EV sales. I suspect the truth is that the legacy auto and big oil industries are running scared and blowing smoke. They are doing their best to slow the introduction of EVs in general and Tesla in particular.

(Source: Autoweek)

While legacy car makers can afford to sell EVs at a loss and recoup those losses with sales of internal combustion engine vehicles, which still are the preferred choice in America, Tesla doesn’t have ICE sales on which to recoup EV losses, Lutz said.

“The jaws are tightening and I think in another year or two we’ll see a movie called ‘Who Killed Tesla,’ a conspiracy movie starring Leonardo DiCaprio,” Lutz told CNBC.

(Source: OilPrice.com)

The notion that profits from sales of ICE vehicles can fund the development of EVs presumes that ICE sales will remain robust. This idea presumes, incorrectly, that there is a 1 to 1 correlation between ICE and EV new car sales.

This is incorrect. Buyers of EVs will just hold onto their older cars for a few extra years until they understand EVs better and until an EV with the features and style they desire is offered.

The fact is, ICE vehicle sales already are plummeting (see red entries in the table below).

Legacy auto makers today are like a wolf caught by the leg in a trap. To survive, they’ll need to chew off their own leg. In other words, they’ll need to throw away their industry advantage in the form of hundreds of billions in assets devoted to building ICE engines that, going forward, are worthless.

The simplicity of the problem is staggering, as is the pain required to avoid demise.

Start-up EV companies, in contrast, suffer from lack of experience and a lack of funds. They need to build new car production lines and don’t know how. But at least all of their efforts and all of their assets are focused on the future of big auto, namely, EVs.

Who will win? Probably the start-up companies unless some legacy auto companies actually begin to take the EV disruption seriously.

Now, let’s explore some Tesla sales metrics so that it becomes clear that EVs are on their way to taking over the entire auto market.

Tesla Owns the US Luxury Car Market Space

The Tesla Model 3 is by far outselling all other luxury cars in the US market space. We can expect this to repeat in foreign markets as soon as Tesla can increase production of the Model 3. We also can expect this to repeat with the Model Y and Tesla pickup when they are introduced.

(Source: Cleantechnica here)

The Model 3 is selling nearly five times more cars than the nearest luxury competition. And none of those competitors are EVs. This is a clear signal that car buyers prefer EVs over ICE.

(Source: CleanTechnica chart from Automakers data)

As a brand, Tesla worldwide sales have now passed Porsche and Jaguar.

Model 3 is crushing the US passenger car market

When it comes to performance growth, Tesla has become a rocket.

The Model 3 is now the No. 4 best selling passenger car sold in the US (see chart below). This means it has passed over 100 models of ICE vehicles and has just three more to go to become No. 1.

I expect the Model 3 will pass the Toyota Camry and take the No. 1 passenger car position before the end of 2018.

(Source: Goodcarbadcar here. Note: Re arrange data by clicking “Month” twice to sort on September sales instead of YTD sales)

The May 2018 AAA survey found that 20% of their customers expected their next car to be an EV. AAA estimated 50 million Americans are waiting for the right EV to meet their particular needs. I use different numbers and estimated there are around 25 million Americans waiting for the right EV. This means there are between 25 and 50 million people in the US delaying their new car purchase until the right EV, for them, becomes available.

From the 2017 survey to the 2018 survey, about 5% or 5 million Americans were added to the EV future buyers list. This again matches my above estimate that 8 million per year are now switching to EVs as their next new car choice.

When AAA repeats the survey next May, I expect they’ll find 30% of Americans are waiting for the right EV. This will pull another ~10 million Americans out of the new ICE vehicle market space.

That so many Americans are on the sidelines for their next new car purchase explains all of the red cells in the table above.

Tesla Owns the US EV Market Space

If the EV will become the future of big auto, who owns the EV space? Are Tesla Killers like the Chevy Bolt and Nissan Leaf actually killing Tesla sales?

The Chevy Bolt (GM), Nissan Leaf (OTCPK:NSANY) and all other EV models selling in the US today are failing to win market share as is easily seen in the graph below. In December 2017, before Model 3 sales were growing, the Chevy Bolt made it to 3,227 cars sold. Then in January 2018 the Model 3 took control of the No. 1 selling EV in the US as seen on the graph below with data through August. September ratio was 22,250: 1,549 or Tesla Model 3 again outsold Chevy Bolt by 14 to 1.

(Source: Hyperchange)

I have included only BEVs (battery electric vehicles) on this next graph so that the cars are equivalent to the Tesla models. Notice that the top 3 selling BEVs in the US are Tesla BEVs.

(Source: InsideEVs data, Authors graph)

The data in the above graph can be plotted a different way. The following graph shows the ratio of Tesla EVs sold vs. all other brands of EVs sold in the US in 2018.

The equation is: Sum {Tesla US sales} / Sum {all other EV brands US sales}

(Source: InsideEVs data, Authors graph)

What we see is that within the US, nearly nine out of every 10 BEVs sold are Tesla. And Most of those are the Model 3.

(Source: Bloomberg NEF)

The turquoise band showing North American sales is mostly Tesla cars. When Tesla grows its production enough to sell cars into the other markets it will do well. When Tesla opens it’s Gigafactory 3 in China it will disrupt the Chinese EV market as well as the Chinese ICE car market.

Tesla has won such a stronghold in the US that it is now dangerous for any other brand to attempt to capture market share here. What company wants to release their new BEV into the US only to have it crushed by the Tesla Model 3?

Mark Spiegel claims that the competition will kill Tesla. Listen to his talk where he rattles off a large number of so called Tesla Killers to support his Tesla short thesis.

Then, look at the graph above to see those Tesla Killers all with nearly zero sales. The graph shows that his claims are incorrect. Tesla is killing every EV entrant.

This isn’t what Spiegel, Chanos, Einhorn, and other shorts claim will take place. Rather, this is what is taking place.

Tony Sacconaghi recently put it this way in a note to shareholders:

“But let’s make this clear: there is no actual flood of competition coming,” the analysts, led by Toni Sacconaghi, said. “We tallied up every announced electric vehicle arriving in the U.S. between now and 2022, and the results were stark.”

Tesla deliveries for Q3 2018 are double Q2

Tesla Q2 vehicle deliveries were 40,768 as can be seen on two of InsideEVs graphs below. In Q3 the figure more than doubled to 83,500.

(Source InsideEVs here)

Tesla sales were steady last year at ~25k cars per quarter. Then, sales increased in Q2 and more than doubled in Q3 as Model 3 production began to hit its stride. The dramatic increase in the height of the red bars is easy to see as an improvement compared to previous years.

(Source: Bloomberg here)

The above graph shows Models S and X, for which manufacturing capacity already is maxed out alongside Model 3 production that just began growing. Model 3 should double in the coming year.

Will Tesla Show a Profit in Q3?

After building the production lines and beginning sales for Models S and X, Tesla showed a small profit in 2013 and 2016.

While tiny, the trend is expected to repeat for Model 3 this quarter. After each new vehicle production line was completed, the losses suddenly ceased and a net profit (albeit tiny) materialized. Immediately after those single quarter events, Tesla jumped right back into spending to develop the next in its line of vehicles.

(Source: the Atlas here)

Those two quarters of profits, after each model started selling, verified for Elon Musk that the company could be profitable. Elon Musk and Tesla staff understood this but Wall Street saw the two quarters as flukes that deviated from the norm of burning cash as bears like to put it.

If the pattern repeats, then this quarter, Q3, is when Tesla should again show a profit following the enormous spending in previous quarters to get the Model 3 production line up and running. This third time, if Elon Musk holds to his stated intention, Tesla will hold back on spending for two full quarters so that the net profits become obvious and undeniable to everyone.

My revenue estimate in a recent article was $6.78 billion for Q3. This is slightly higher than my $6.5 billion estimate last May.

That’s about a $2.8 billion increase over Q2. In Q2 Tesla lost about $700 million so that the revenue growth is about $2.1 billion greater than is needed to reach break even based on Q2 spending. The staffing hasn’t changed dramatically, though the COGS will certainly be higher due to the larger volume of cars sold.

If Tesla managed to improve efficiency such that spending in Q3 grew less than about $2 billion, then a profit should be reported. Based on my calculations and things I’ve read I think a net profit around $300 million should be close to what’s reported in the upcoming earnings call.

If a net profit is realized, and especially if it’s repeated and larger in Q4, then the bear thesis will be proven wrong. If Tesla holds back on spending for new production lines for another 2.5 months, then the bear thesis should die and Tesla can resume bringing cash in to expand the product line.

Challenges to my assertions

  1. If one of the legacy auto makers joins Tesla to gain access to the SuperCharger Network, that auto maker will have an advantage over all others. This assumes Tesla is still open to this course of action.
  2. If the Jaguar I-Pace is actually launched into the US and sells like hotcakes, then it will prove consumers don’t care about the Supercharger advantage and my expectations will be wrong. If sales are initially strong and then crash as YouTube videos reporting the horrible charging experience are released, as I expect, then my thesis is proven correct.
  3. If Tesla increased spending in Q3 by more than $2 billion, then it will likely not show the $300 million net profit I expect.

Conclusion:

Tesla EVs sell nearly 9 to 1 over all other brands of EV combined in the US. When Tesla is able to sell the Model 3 in other markets, I expect sales of other EVs to drop just as have Chevy Bolt and Nissan Leaf sales dropped in the US.

Other car makers (Jaguar / Mercedes) seem to be stalling the release of their EVs into the US. They are potentially scared their entrants will fail against the dominance of the Model 3 in the US market space.

If / when Jaguar and other new EVs enter the US market I expect their sales to start off well as loyal customers purchase their EV models. A month or two later I expect every EV entrant will drop in sales after YouTube videos show how slow they charge at existing 50kW chargers. It will be many years, if ever, that a fast charger system to rival the Tesla Supercharger Network is deployed.

Tesla should report around a $300 million profit for Q3. Tesla profits in Q4 should exceed Q3 profits. Share price should jump on Q3 earnings report in early November.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.