By Gene Munster
The Tesla (TSLA) Model Y event went largely as expected (see our preview here). Tesla’s public comments have always called for “volume production in 2020,” so last night’s announcement is in line with their previous commentary. We had expected some early units to be available in 2019 (see here), but the company’s message regarding 2020 availability has been consistent.
- The company is investing in 2019 for Model Y production starting in 2020. If the company was in need of cash, they would not be aggressively investing in expanded production in 2019.
- We continue to believe that Tesla will likely raise cash in 2019. While a raise would be viewed as negative in the near term, it would be positive in the long term, potentially putting to rest longer-term investor cash concerns.
- In other words, we think it’s the right strategy for Tesla to raise money to fund what we view as the best product roadmap in tech around EVs, autonomy, and renewable energy. We continue to believe Tesla will be a winner in capturing this next wave.
Our takeaways from Model Y event:
- Size. We believe Model Y is big enough to compete in the crossover the market. We liken it to an Audi Q5 (Model Y has more interior space): it does have a 7 person seating option, although the back row is two foldable jump seats.
- Price. The base model is as expected at $39,000, below the Jaguar I-PACE ($69,500) and the Audi e-tron ($74,800).
- Availability. Model Y will be available later than we anticipated, with initial deliveries starting in the fall of 2020, a year later than our expectation. The timing of the $39,000 base model was in line with our expectation, available early in 2021.
- Reservations. Our best guess is they’ll take in 100k reservations in the first two weeks (before the end of Mar-19). Previously we had expected 175k reservations. The lower reservation number is attributed to the later initial shipments (fall of 2020).
- Cash flow from reservations. The $2,500 preorder was slightly more than our $2,000 estimate. At 100k reservations, that implies $250m in cash flow in Mar-19 from reservations.
The key takeaway from last night’s event is largely being lost in today’s news. Model Y represents the most compelling value in electric mid-sized SUVs. The main competition in the next several years (Audi e-tron, Jaguar I-Pace, Mercedes EQC) will start above $70k, or $30k more expensive than the Model Y.
Tesla Should Raise Cash, Short Term Pain for Long Term Gain
We left the event thinking about the impact of Model Y availability coming in fall 2020 instead of fall 2019. Before we had expected a small profit in the Jun-19 quarter would stabilize cash, would allow the company to meet its $566M note due in November of 2019. Based on logistics difficulties in delivering Model 3 to China and Europe, we now believe the Jun-19 quarter will be breakeven at best. Putting it together, the company appears to have to raise cash to meet the November debt payment and working capital needs. While this raise would fuel concerns around the company’s prospects and would be negative for shares of TSLA in the near-term, it would put the company on track to bridge the gap between meeting its debt requirements and volume production of Model Y early in 2021. Based on our conversations with the buy side investors, we believe the company can successfully raise enough cash ($1-2B) to reach long term profitability. We continue to believe Tesla will be a winner in capitalizing on the EV growth curve, but the 2019 road will have some bumps.