Musk said Tesla would not be profitable in the first quarter of 2019 and disclosed that Tesla is closing most of its brick-and-mortar stores.
The outspoken and controversial Musk has often lashed out at short sellers for betting against Tesla, but one analyst said Friday’s selling wasn’t coming from the shorts.
Musk added that he expected Tesla to be profitable in the second quarter.
Musk’s statement marks a reversal from his prior prediction that Tesla would be profitable in every quarter beginning in the third quarter of 2018. During the automaker’s fourth-quarter earnings call, in January, Musk had said he was “optimistic” that Tesla would earn a small profit during the first quarter.
Musk had said on that January call:
“I’m optimistic about being profitable in Q1. Not by a lot, but I’m optimistic about being profitable in Q1 and for all quarters going forward.”
Short Sellers Holding Ground
Financial technology and analytics firm S3 Partners analyst Ihor Dusaniwsky said Tesla investors can’t blame short sellers this time.
Tesla’s outstanding short position is around $8.22 billion, the third largest among all U.S. equities. Despite the huge 7 percent sell-off on Friday morning, Dusaniwsky said the size of Tesla’s short position didn’t change much. He said the relatively modest increase in Tesla short selling on Friday morning was negligible compared to the 14 million in volume that drove the price drop.
“With short sellers pretty much standing on the sidelines with a Cheshire cat grin on their faces, it is long shareholder selling that is driving Tesla’s stock price down.”
Last month, Tesla said the Model Y will share about 75% of its components with the Model 3, and it expects Model Y production to scale up “significantly faster” than the Model 3. Tesla said that will help keep the Model Y’s price lower compared to rival SUVs.
Model Y, being an SUV, is about 10% bigger than Model 3, so will cost about 10% more & have slightly less range for same battery
— Elon Musk (@elonmusk) March 3, 2019
Morgan Stanley’s Adam Jonas wondered whether Tesla’s focus on lower-cost electric cars could dim its “halo” as a luxury brand. Jonas said:
“Tesla significantly increased its efforts to promote the sale of cheaper cars. While this may stabilize the air-pocket in Q1 sales, we’re concerned it’s a sign of a brand that may be, at the margin, losing its halo of exclusivity. We think the bears have more material to work with than bulls here.”
Other analysts took an even more critical tone, with Barclays referencing The Matrix’s red-pill, blue-pill choice as one that Tesla investors may be facing. In their research note, Barclays wrote:
“Another few ‘blue pill’ bull case points undermined. As we have long argued, the bull case for Tesla often revolves around it being the next Apple, with the Model 3 as the iPhone,” Barclays’ note said. “But today’s announcement of a lower priced $35k Model and closing all stores/galleries undercuts a few of those pillars.”
From here, investors will want to watch to see how the availability of lower-cost Tesla vehicles affects the company’s profitability. In addition, management’s decision to close stores and shift sales entirely online is notably unchartered territory for an auto company Tesla’s size. Will demand be sufficient under this new sales approach?
Yet investors are also nervous about some other moves that Musk announced. Tesla will close most of its retail store network in favor of relying solely on online sales, in an effort to find ways to cut back on costs. Even with whatever savings it can gain from those closures, the company now expects that it won’t make a profit in the first quarter, disappointing those who’d relied on previous guidance that pointed toward positive earnings.
SEC’s Accusation of Deal Break Aren’t Helping
Recently Musk’s tweeting habits have triggered another legal challenge from stock market regulators worried about him using his Twitter account to mislead investors.
Now the SEC is alleging that Musk broke the terms of that agreement with a Feb. 19 tweet projecting that Tesla would make about 500,000 cars this year and they asked a federal court in New York to hold Musk in contempt for violating a $40 million settlement he begrudgingly reached with the U.S. stock market’s chief regulatory agency five months ago.
Longer-term, the big question is whether the price cut implies falling demand for Tesla vehicles or simply the company following through on its past customer pledges. The answer will play a big role in determining whether the stock rebounds or keeps falling.