* What's changed
We attended Tesla’s Model 3 delivery launch event on July 28, taking rides
in both the Model 3 and Model S products. In our view, the event was a bit
anticlimactic, with no noticeable incremental features moving from the
Model 3 unveil to production model. That said, Tesla does now have a
lower-priced vehicle in production and 500k orders. However, CEO
commentary was slightly cautious on the upcoming prospects of hitting its
communicated launch curve – a key tenet of our Sell call. Lastly, we tweak
our 2Q17 estimates slightly for a lower gross margin given mix issues; we
continue to expect a miss and downward estimate revision for 2H17E.
* Implications
To the positive: Production Model 3 unveiled, with Tesla releasing two
variants: the Standard ($35k base / 220 mile range), and the Long Range
($44k base / 310 mile range). Model 3 reservations now over 500k, up
from 373k in May 2016 – indicating continuing follow-through demand. To
the negative: We expect Auto gross margins to disappoint as 2Q17
(GSe 24.3% vs. guide of approx. 25.3%) likely impacted by production mix
issues with the 100 kWh battery-size vehicles in the quarter. Further, we
maintain that 2H17 margins will be diluted due to Model 3 (GSe 16% vs.
Street 24%). No incremental features: Model 3 remains a de-contented,
smaller version of the Model S; and the production vehicle showed no
incremental HMI features from the vehicle unveiled last year. Our top
questions for earnings: Pace of demand for the Model S, 2H17 gross
margin guidance, and expected timing for next capital raise.
* Valuation
Our 6-month, $180 price target is derived from our probability weighted
Automotive ($138), Tesla Energy ($35), and SolarCity ($7) valuations.
* Key risks
Model 3 production cadence, stronger Model S/Model X demand, positive
free cash flow generation, and incremental new product announcements