My Fearless Forecasts For Tesla's 2020

I’m making some predictions about how Tesla will fare in 2020 so that, come year-end, my critics can grade my report card.

Some things I'm pretty certain about. Others, much less confident. And then there are the wild cards.

Note: These forecasts concern fundamentals. They are not predictions about what the share price will do. I'm not that crazy.

Let's get right to it: My forecasts for Tesla's (TSLA) 2020.

I. Things About Which I Am Confident

There's nothing like making forecasts with utter confidence. It all but guarantees you'll stumble and embarrass yourself. So, perhaps treat this in the spirit of George Costanza in the famous Opposite Seinfeld episode.

1. Any Q4 profit won’t be sufficient to rescue 2019.

As we await the Q4 results, Tesla has racked up a 7 million GAAP loss through the first three quarters.

Q4 will likely be profitable. Tesla will have achieved record deliveries, at somewhat higher ASPs than Q3, and has benefited from the "wealth effect" that will enable many Tesla investors to buy a Tesla vehicle. Moreover, Tesla has several levers it can pull to generate a Q4 profit, including sale of regulatory credits, recognition of revenues from the FCA pooling agreement, games with warranty reserves, and games with lease deals.

Consequently, I expect a Q4 profit. However, the Q4 profit won’t be nearly enough to cover the loss over the first three quarters. So, write it down: 2019 will be Tesla’s 10th consecutive year of losing money since going public.

Ten unbroken years of losses as a public company. That has to be a record. It’s certainly a testament to the willingness of analysts, the media, and investors to believe in the next new shiny object even when the earlier ones have tarnished.

Shiny objects for 2020: The Model Y, the Cybertruck, the Shanghai factory, and the proposed factory in Germany.

2. Tesla won’t run out of cash any time soon.

Tesla finished Q3 with .3 billion of unrestricted cash on the books. It just obtained a .6 billion credit facility in China.

So, for now, Tesla has plenty of cash. So much, in fact, that I think it would have difficulty explaining why more is needed for any capital raise during the first half of 2020 without tarnishing the rosy scenarios for Shanghai and the Model Y.

Note: Tesla’s spending on capital expenditures is materially higher, and its actual free cash flow is materially lower, than they appear. The reason is Tesla’s extensive use of capital leases. I may write about this in more detail soon, but for now offer this informative thread from Twitter user @evebitdap on what he calls Tesla's "stealth capex."

(Oh, one other thing about 2020. We're sure to keep reading lots and lots about this guy. Photo credit: Tobias Schwartz/AFP via Getty Images)

3. Model S and X sales will continue to decline everywhere unless Tesla (further) cuts prices.

2019 saw a dramatic decline in sales of the Model S and Model X, despite continuing price cuts and declines in the ASPs of those cars. 2020 will be worse as more luxury EV competitors arrive.

So, Tesla will either produce fewer Model S and Model X cars in 2020, or it will cut the prices of those cars, or both. Regardless of which route Tesla chooses, those models are now simply adding to the red ink.

4. Without price cuts, Model 3 sales will decline in the U.S. and Europe.

Tesla will achieve record Q4 deliveries thanks to an impending major change to tax laws in The Netherlands, where Tesla delivered 16,289 Model 3 cars during the quarter.

Unless Tesla cuts prices, its sales in Europe will decline in 2020. Norway, where EV incentives remain strong but without any fiscal cliff such as The Netherlands just presented, is a lesson in organic demand for Tesla cars:

(Source)

Yes, the United Kingdom is now offering significant incentives to purchase EVs, and that undoubtedly will help Tesla. But it will help just about every other OEM selling EVs as well. And it won’t be nearly enough to make up for the collapse in demand in The Netherlands, where deliveries will drop from the 16,877 Q4 sugar high to perhaps (at best) a very few thousand in Q1 2020.

Many bullish analysts have failed to consider that, except for Tesla, all auto manufacturers had an incentive NOT to sell EVs in Europe during 2019, but during 2020 have a huge incentive to do so. A few months back, Seeking Alpha’s jaberwock wrote a superb analysis of how, in light of the European Union’s mandatory CO2 emission targets for new passenger cars, the European EV supply and demand pictures will change as we move from 2019 to 2020. Every word is worth re-reading.

5. The 2020 earnings consensus will be revised downward, and Tesla will again lose money.

As I write this, the so-called “consensus” earnings for Tesla in 2020 is more than per share, and the consensus for 2021 is more than per share.

It never fails. It's like the swallows returning to Capistrano. The analysts whose collective “analysis” is factored into the consensus figure, must each year reduce what begins as a profitable future earnings forecast until the forecast finally converges with reality, which is negative.

It will happen again in 2020. Here’s why. In the U.S., Tesla demand is shrinking. Last year, Q3 2019 revenues were down a whopping 40% from Q3 2018 revenues. On top of that, the expiration of the federal income tax credit on Dec. 31 very likely pulled forward some 2020 demand. Absent more price cuts, the Q1 delivery number will not be as high as the Q4 number. And with price cuts, revenues and profits will suffer.

In Europe, the situation is even more acute, for the reasons outlined by jaberwock in the article to which I earlier linked.

That leaves Asia, which is mostly China. The Chinese EV market is hugely competitive. The overall auto market there is contracting.

Will Chinese demand for Chinese-made Tesla vehicles be materially higher than Chinese demand for Fremont-made Tesla vehicles? Possibly (see discussion below). But every Tesla made in Shanghai means one fewer made in Fremont, which reverses the overhead absorption that enabled Tesla to reduce its Fremont manufacturing costs in the final half of 2019.

So, I’ll put it out here. Tesla will once again, on a GAAP basis, lose money in 2020.

6. There will be no FSD (though that doesn’t mean revenue won’t be recognized).

Elon Musk famously promised, both during Tesla’s “Autonomy Day” presentation on April 22 and in a private investor call on May 2, that before 2020 ended, there would be one million Tesla cars on the roadways capable of full-self driving. He also promised Tesla would swap out the computer on existing cars with a new computer (called the “Tesla FSD Computer,” previously known as the “Tesla HW 3.0 Upgrade”) designed by Tesla engineers. That process was supposed to have begun last summer.

All of this, averred Musk, would transform Tesla vehicles into appreciating assets. Indeed, the appreciation might be three-fold, or even five-fold.

Based on anecdotal reporting, few cars have seen their computers upgraded. More fundamentally, there are as yet no Tesla robo-taxis on any roadway anywhere. A cloud of suspicion hangs over Tesla’s “Autopilot” (which has hardly more functionality than enhanced driver assistance programs offered by other automakers, here, for example, is a description of the technology available on BMW cars).

I'm confident Full-Self Driving is coming. But I’m equally confident that, outside of carefully geo-fenced areas, it’s not coming in 2020. Nor, indeed, in 2021. Too many daunting problems remain unsolved. And it’s doubtful Tesla will be first to solve them.

So, mark it down: No Tesla robo-taxis this year. And no appreciating Tesla vehicles, either.

7. Tesla’s solar roof tiles will remain a niche product in trial mode.

Less than three months ago, Elon Musk said Tesla was aiming to install 1,000 solar roofs per week by the end of 2019. To say the least, that did not happen. To date, solar roof tiles have been installed on very few homes, and the installation process takes weeks rather than the eight hours promised by Musk, and requires a great deal of labor.

In 2020, the solar roof tiles will remain a niche product. They will be installed on fewer than 100 homes. They will generate only losses for Tesla. In all likelihood, Tesla continues to experiment with the product only because of the allegations it faces in pending Delaware litigation that the solar roof tile was introduced while still non functional in order to grease the skids for Tesla's acquisition of SolarCity.

8. We won’t see the Semi or Roadster 2

Exactly 777 days before the date on which I'm submitting this article, Tesla unveiled its Tesla Semi and Roadster 2.

Neither will be available for purchase in 2020.

9. Once manufactured, if ever manufactured, the Cybertruck will cost more and do less than promised.

Several months ago, Musk announced the Cybertruck. I doubt we’ll ever see the Cybertruck manufactured, and if we do, it will be with higher prices and more modest specifications than those promised by Tesla at the Nov. 21 broken-windows reveal.

Keeping the focus on 2020, however, I’ll simply forecast this: This year, Tesla will spend little to nothing on either a manufacturing facility or manufacturing equipment for the Cybertruck.

II. Things About Which I Am Uncertain

Maybe yes, maybe no. Allow me a bit of wriggle room here.

1. Will there be yet more subsidies and mandates to rescue Tesla?

Over its 10-year history as a public company, Tesla has received billions of dollars in direct or indirect subsidies. These include close to billion in U.S. federal income tax credits, hundreds of millions more in tax abatements from California and Nevada, tens of millions more in buyer rebates from California, Massachusetts, Georgia, and other states, a variety of other goodies in Nevada, including free land, cheap electricity, and transferable tax credits, and a factory and factory equipment in Buffalo, New York, costing just shy of billion.

Besides the subsidies, numerous governmental policies penalize buyers of internal combustion cars, and even some hybrids. In some instances, these policies simply make the cost of the ICE vehicles higher relative to EVs (as is the case in Norway). In other instances, these policies require manufacturers of ICE vehicles and hybrids to purchase indulgences, such as ZEV credits under the California regime or emissions credits under the European Union’s scheme. That amounts to a silent tax on the buyers of non-EVs.

Would Tesla even exist without those billions of dollars of direct and indirect subsidies and mandates? That seems doubtful. Even now, it’s at least arguable that the EU emissions rules, which have led to emissions credits pooling agreement with FCA, are keeping Tesla afloat.

Despite a lobbying effort by Tesla and General Motors (GM), one of the major sources of Tesla’s subsidies – the U.S. federal income tax credit – has finally dried up. Will other jurisdictions offer new opportunities for subsidy snuffling?

That seems likely. Just recently, for instance, France put in place a policy penalizing internal combustion SUVs. However, as more OEMs are forced into the EV space, the number of hungry EV-maker mouths to feed is growing, and future subsidies will be less nourishing to Tesla than formerly they were when Tesla was the undoubted king of the luxury EV market.

2. Will the Shanghai factory be successful?

Will Tesla’s Shanghai factory merely shift production from Fremont to China, or will it materially increase Chinese demand for Tesla products?

Some commenters, including Seeking Alpha’s Motorhead, pointing to Tesla's billion capital expenditure commitment, and the 5 million in annual tax revenue Tesla must eventually generate, are convinced China will be catastrophic for Tesla.

Me? I’m not so sure. It all depends on how whether the Chinese government’s long game is (1) to have Tesla succeed or (2) to end up with ownership of the Shanghai factory and, effectively, much of Tesla’s technology. The recent extension of the .6 billion credit facility would seem to suggest that, at least for now, the Chinese authorities will do what they can to help Tesla succeed.

3. New York State – will it once again avert its eyes from the Riverbend fiasco?

Tesla’s promises to New York State have been materially watered down by means of two quietly-made amendments to the original Riverbend agreement. I’ve written about that here, here, and here, and Bethany McLean wrote a fine Vanity Fair piece with more detail here.

The language in the Riverbend agreement, even as watered down, requires that Tesla meet the following minimum employment requirements this year:

• 500 Tesla employees at the Riverbend factory;
• 960 Tesla employees elsewhere in Buffalo; and
• 2,000 Tesla employees elsewhere in New York State.

All the jobs come with a minimum five-year retention requirement. Further, under the terms of the agreement, the employees must be Tesla employees (indeed, to be technical, employees of Tesla’s second-tier subsidiary, Silevo), and not the employees of a third party such as Panasonic.

Nevertheless, it appears that, last year, New York State officials administering the program allowed Tesla to count Panasonic employees as its own, and required only 500 employees in total.

In 2020, will New York State continue to wink at Tesla’s material non-compliance? That’s TBD, but all indications are that New York State politicians would prefer to pretend all is well rather than slap Tesla with the million fine called for by the agreement.

III. The Wild Cards

Finally, there are the wild cards. Events that are contingent, unpredictable, and unquantifiable. Here are four of them (and no doubt there are more):

1. NHTSA investigation

We know the National Highway Traffic Safety Administration is investigating 12 different automobile accidents in which Tesla’s Autopilot may be implicated. In the past, the NHTSA has manipulated its data to cover up for Tesla, as documented by Randy Whitfield of Quality Control Systems, and reported by Edward Niedermeyer at The Drive.

Will it be any different this time? TBD.

2. Funding Secured Lawsuits

Tesla and Elon Musk appear to have put behind them their SEC troubles arising out of the infamous “funding secured” tweeting on Aug. 7, 2018. However, they still face private class action litigation, now consolidated in California federal court, with potentially large damage amounts.

Will that litigation result in material cost to Tesla and, if so, will that happen this year (the lawsuits thus far have scraped along at a glacial pace). TBD.

3. Delaware SolarCity Lawsuit

Claims arising out of Tesla’s 2016 acquisition of SolarCity are set to go to trial in Delaware Chancery Court commencing on March 16. The litigation already has given rise to some eye-opening deposition testimony and shocking documentary evidence, assembled by plainsite.org here and reported on by, among others, Bloomberg and CNBC.

The claims in Delaware are both “derivative” (brought against individual Tesla directors on behalf of Tesla, with Tesla the party that would benefit from any recovery) and “direct” (class action claims brought by individual shareholders against Tesla and the individual directors).

Whether the case will settle or be tried, and what the monetary damage or benefit will be to Tesla, are all TBD. Much depends on the damage testimony of the plaintiffs’ expert witnesses and, as well, on the extent to which Tesla owes defense and indemnity obligations to the individual defendants.

I do not have access to the expert reports on damages, and have not done a deep enough dive on other aspects of the case, to have an informed view on whether the outcome is likely to be material to Tesla. But the evidence certainly is not flattering either to Musk, the Tesla directors, or the Tesla investment bankers who shepherded the deal.

4. FSD lawsuits

Finally, Tesla faces a number of lawsuits from customers who paid for Full Self-Driving but have not received it. Whether these lawsuits ever cause any material detriment to Tesla, or cause Tesla to withdraw some of its claims about the imminence of Full Self-Driving, is TBD.

That's a Wrap

There you have it.

Get back to me next year to tell me how wrong I was.

Disclosure: I am/we are short TSLA. 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.

Additional disclosure: I am short TSLA via call spreads with 2021 expiration dates. I regard the share price as utterly detached from fundamentals, and recommend investors make any short position only a tiny part of their portfolio.