Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

When a stock trades at 62 times forecast Ebitda, it's tempting to blame high expectations. But in Tesla's case, low expectations are equally culpable.

Tesla Inc. is having a bad week. On Thursday, the Insurance Institute for Highway Safety said Tesla's Model S sedan failed to achieve its top crash rating despite some improvements made after the last time it fell short. This followed Wednesday's news that Volvo -- owned by China's Geely Automobile Holdings Ltd. -- would at least partly electrify all new models from 2019 onward.

And all this came after Monday's release of Tesla's production and delivery numbers for the second quarter. These were not good, with deliveries coming in below analyst expectations and only just scraping the bottom end of company guidance for the first half.

So, as of writing this, Tesla has lost roughly $9 billion in value this week. That is a lot of money, but we should put it in context.

Tesla's stock is still up by almost 50 percent this year. This week's drop takes it back to where it was in late May. And with its market capitalization now a mere $52 billion, it might have dropped back below the size of that other car manufacturer you may have heard of, General Motors Co., but only just:

Merely Second
Tesla's market cap has crashed by a fifth since hitting its peak, but it remains a giant by Detroit's standards
Source: Bloomberg

This is all the more remarkable when you consider evidence that sales of the Model S and the Model X began to emerge at the start of this year, when Tesla reported numbers for the last quarter of 2016:

Is It A Plane?
Tesla's vehicle sales have been flat for the past three quarters
Source: Bloomberg, the company
Note: Production data for 3Q 2014 and sales data for 2Q 2017 are approximate and inferred from company statements.

Besides the unflattering horizontal aspect to those latter bars, another concern is the disparity between production and sales. Tesla has produced more vehicles than it sold for six quarters in a row. The latest excess, of almost 3,700 vehicles, brings the cumulative total in that time to almost 11,700, the equivalent of almost half a quarter's sales at the current run rate.

The company blamed the disappointing deliveries on a temporary shortfall of large battery packs and, in a curious turn of phrase, said it is "confident" deliveries of the Model S and X in the second half will "likely" exceed the total for the first half. The caveat there suggests they'll broadly stay flat.

One thing that lets Tesla bulls look past this is the promise of the next vehicle: the Model 3. Tesla CEO Elon Musk tweeted out some teasers a few days ago, saying he expected the first production model this week, a handover party of the first 30 at the end of the month and production running at 20,000 a month by December.

Given the Model 3's central role in pushing Tesla toward being a genuine mass-market vehicle manufacturer, this is exciting stuff for investors. But it's also relatively thin gruel compared to what they had expected before.

Speaking on an earnings call just over a year ago, Musk estimated Tesla would produce between 100,000 and 200,000 Model 3 cars in the second half of 2017. Based on his latest, tweeted guidance of 30 in July, 100 in August, about 1,500 in September and 20,000 in December, it will fall far short of that:

Downsizing
Tesla's actual Model 3 production in the second half of 2017 looks likely to be a third or less of original figures touted by the company
Source: The company, Bloomberg Gadfly estimates.
Note: Estimate based on latest guidance assumes 5,000 Model 3 cars produced in October, and 10,000 in November.

Even my estimate of about 37,000 could be too high; Evercore ISI is forecasting just 28,000.

To be fair, Musk did warn people not to take him literally on those numbers. On the same call back in May 2016, he explained Tesla had to set ambitious targets in order to push its staff and suppliers to work as fast as possible, so production in volume would necessarily arrive several months after the target date. On another call several months later, he added that the "S-curve" nature of demand for the Model 3 -- meaning it would start slowly and then explode -- made it doubly harder to commit to production targets in this or that particular quarter.

Fine. But really? From north of 100,000 to maybe less than a third of that all in the space of a year? Meanwhile, Tesla is struggling to meet delivery targets on its existing models and still hasn't updated investors on the number of deposits for the Model 3 on its books in more than a year, despite regular inquiries from analysts.

Yet, by and large, Tesla's investors bought it. From the time Musk made that initial estimate for the Model 3 to June 23, 2017 -- when Tesla's stock hit an all-time high -- the shares increased by 78 percent. Even now, after the recent correction, they're up by almost 40 percent.

The point here is that to be a Tesla bull, it is of course necessary to have high hopes for the company's long-term success (which were bolstered by Bloomberg New Energy Finance's latest electric vehicle forecasts on Thursday).

Equally (and paradoxically), however, you also have to be happy to lower your expectations, particularly around nearer-term, more tangible things, such as the Model 3 schedule or conserving cash or quarterly earnings:

Rightsizing Hope
Forecasts of positive quarterly earnings for Tesla end up slipping into expected losses -- which the company often still misses
Source: Bloomberg

(Incidentally, that surprisingly good third quarter for 2016 was anomalous in several ways.)

So getting Tesla to the point where it was valued more highly than GM and Ford wasn't just about believing in Musk's vision. It was also about forgiving or ignoring each slipped schedule or target.

The latest sell-off carries a hint that such poverty of expectation has its limits. But don't be surprised if a tweeted photo of a single finished Model 3 this month ends up trumping any concerns about the tens of thousands yet to materialize.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net