This commentary from Elon Musk should terrify Tesla's investors – Motley's Fool

Last week, You're here (NASDAQ: TSLA) reported ugly results for the first quarter of 2019. The pioneer electric car had warned of impending problems earlier this month, but investors were still caught off guard by the magnitude of its losses. Tesla's net loss of $ 4.10 per share – or $ 2.90 per share, excluding stock-based compensation costs – was worse than the estimates of even the most bearish analysts. On average, analysts expected a loss of only $ 0.69 per share.

Unsurprisingly, the terrible results of Tesla's first quarter did not dampen the enthusiasm of CEO Elon Musk. Musk has confidently predicted that Tesla will return to solid profitability in the second half of 2019 and will generate positive free cash flow as of this quarter.

However, a comment made by Musk during the Tesla results call should make investors extremely skeptical about these optimistic forecasts. We will take a look.

Tesla has a demand problem

The sequential drop in vehicle shipments was the main cause of the erasing of Tesla's results in the first quarter. Tesla delivered approximately 63,000 vehicles in the last quarter, down 31% from the fourth quarter of 2018. The performance of the S and X models was particularly poor, with 12,100 deliveries combined, down more than 50% compared to the typical business run rate for 2017 and 2018..

Sales of Tesla Model S and Model X dipped in the final quarter. Source of the image: Tesla.

Part of the slowdown is attributable to the expected increase in the number of vehicles in transit to customers outside the United States. Logistics issues also pushed some deliveries into the second quarter. That said, weak demand was the main cause of the sharp decline in S and X model shipments.

Demand for Model 3 has also declined significantly. Many investors expected that the introduction of the $ 35,000 standard-size model 3 will create a huge backlog of applications that will take several months to fill. The price reductions for high-end variants should have added to this demand.

Instead, Tesla currently promises deliveries within two weeks for all versions of Model 3 in most, if not all, of the United States. That's a huge change from a few years ago, when Elon Musk claimed that the Model 3 reservation list was growing steadily, even as Tesla "opposed" the car without advertising, without discounts or available driving tests.

Musk expects a fast rebound from orders

Tesla's forecast that free cash flow and earnings should return to positive territory will soon depend on a rebound in shipments. According to the company 's official forecast for the whole year, between 360,000 and 400,000 deliveries, of which 90,000 to 100,000 in the second quarter. In the midst of these ranges, Tesla is expected to deliver an average of 111,000 vehicles per quarter in the second half of 2019, up 76 percent from its first-quarter delivery rate.

Elon Musk expects Tesla's orders activity to increase steadily in 2019. Image Source: Tesla.

However, it is becoming clear that orders are expected to accelerate dramatically to support this level of growth. When calling the first quarter results, Mr Musk said: "Thus, with the recently announced improvements in the S and X models, as well as the continued expansion of Model 3 around the world, we expect that the rate of orders will increase significantly throughout the year, our production levels. "He emphasized this point later in the call in response to an analyst's question, noting that" people just do not like to buy cars in winter. "

It is true that auto sales tend to be low in the season, in January and February. However, the introduction of Model 3 of $ 35,000 and price reductions for the rest of Tesla's portfolio should have boosted demand. In addition, with March and April tending to be stronger months, Tesla's orders activity should have already rebounded to a sustainable level.

Instead, Musk's comments on the call for results indicate that he is counting on orders to continue to accelerate in 2019. This should be very worrying for investors as it means that forecasts of Tesla for the rest of the year are probably based on unrealistic assumptions.

With regard to Tesla, skepticism pays

Experience shows that Musk's apparent confidence in accelerating demand in 2019 does not mean much. For example, Musk said when calling Tesla's first-quarter results that he was "optimistic about its profitability in the first quarter and for all quarters to come." Instead, Tesla lost more than $ 700 million in the last quarter and plans to announce another loss in the second quarter.

In fact, there is good reason to doubt the recovery in demand, especially in the United States, which has always accounted for most of Tesla's sales. First, Tesla has already exhausted the pent-up domestic demand pool of Model 3. Second, the federal electric vehicle tax credit for Tesla's purchases is expected to fall by 50% ($ 1,875) on July 1 , which will raise the effective price of a Tesla in the second half of 2019. Third, many potential buyers could choose to wait for the transaction. Crossover model Y unveiled last month. Crossovers are much more popular than sedans today.

Musk is increasingly trying to inflate demand for Tesla vehicles. He said the owners of Tesla would earn $ 30,000 a year by renting their vehicles via a robotaxi network next year. (Most experts agree that it will take years, if not decades, for robotaxies to be widely deployed.) This may persuade some consumers to buy a Tesla, but that will probably not change the situation in the long run.

Certainly, many interesting projects are underway at Tesla. However, if the story is a guide, it may take longer than expected. At the same time, the demand for Tesla 's existing vehicles is cooling down, which could lead to a significant supply shortfall in 2019 and 2020. This could increase Tesla's low balance sheet and lower its share price.