April 27th, 2019 by Maarten Vinkhuyzen
It is not often that the Wall Street analysts prove Elon Musk right by themselves being wrong within just a few days.
Everybody who follows this knows that these two countries are on the other side of the Atlantic Ocean. The better informed know that the cars for Europe are sent from Fremont, California, by ship through the Panama Canal. Analysts who follow Tesla should even know that those ships sailed in the first half of last quarter, and that the production in the second half of the quarter was for the home market.
When those ships arrived a few weeks before the end of the quarter, a delivery rush was started to deliver as many cars as possible before the books closed on the quarter. But not all cars got delivered on time. We saw the last cars from those ships getting delivered in the first weeks of April.
“To quickly meet international demand, Europe and China Model 3 builds occurred in the first half of the quarter, with builds for local US markets in the second half,” Tesla’s shareholder letter states, and during the quarterly conference call a few days ago, it was explained that this distorted the figures hugely. It distorted the numbers to the extent that half the quarter’s deliveries occurred in the last 10 days of the quarter.
Okay, back to the waning demand observation. Did half the demand in the last quarter occur in the last 10 days?
Any analyst who tried to say this would be laughed at. So, why are they taken seriously with their claims about the demand in Norway and the Netherlands now? There was no production for Europe 6 weeks ago. There were no ships sailing to Europe 4 weeks ago. There were no cars arriving in Europe 2 weeks ago. There are essentially no deliveries in Europe today. There is zero relation between current demand and deliveries in Europe.
And why does this prove Musk right? On the conference call, there was this question and answer:
Philippe Houchois, Jefferies, Analyst: “And can I ask you a question of coming back to what Adam was saying about the drama that surrounds your stock, unfortunately. Why don’t you reduce some of it by disclosing on a monthly basis your deliveries and also maybe disclosing early your greenhouse revenue instead of just reserves, so we get right away a better view on some of these details that kind of move the stock?”
Elon R. Musk, Tesla, Chief Executive Officer: “I think that would actually be counterproductive because people read too much into what occurred in a month. I mean, even at a quarterly basis, things can be lumpy. And so, the more granularity that’s provided, say, at a monthly level, then people would reach all sorts of conclusions that don’t make sense. It’s like literally, like, sales to a particular country, say, overseas are affected by when the ship arrives. And so, if the ship arrives on the 31st of the month or the first of the next month, this will make it look like something dramatic has happened. But actually, the ship was just a day late. So, people read — that would increase the drama, not decrease it.”
Zachary Kirkhorn — Chief Financial Officer: “And we’re filling the ship 100%…”
Elon R. Musk — Chief Executive Officer: “Filling the ship to 100%. So it just ends up being lumpy. … If you’ve calculated GDP of a country — let’s say the US — GDP on Sunday is extremely low, but GDP on Monday is extremely high … nothing’s really changed.”
Looking at delivery numbers leads to wrong conclusions.
Data and Information
Data and information are not the same thing. Information is produced by giving meaning to data. That is what accountants, statisticians, information technology professionals, data scientists, and sometimes Wall Street analysts do.
That process starts with looking at the question, what is it that you want to know?
At the end of the quarter, we get production and deliveries as a prelude to the financial report. Production volume is an indication of costs, and deliveries times average sales prices is an indicator of revenue. Nothing more and nothing less. They are indicators of the coming quarterly financial report. That is the financial analyst’s question that is answered with these numbers.
If you are interested in demand, you need different numbers. To know what numbers you need, you have to know the market and how the product you are interested in is produced, distributed, and sold.
Take, for example, strawberries. They are mostly sold in summer. Don’t people like strawberries in fall, winter, or spring? Or does supply have something to do with that. And is price perhaps influenced by supply? Most people know this about strawberries. Strawberry jam is sold in all seasons, fresh fruit only in season.
Beer is in large supply all year long. Sales spike around sporting events like the Super Bowl, Olympic Games, or on hot summer days. There is a correlation between demand and these events. Many in marketing even think there is a causal relation between them.
When market analysts have no problem with strawberries and beer, how can they be so wrong with Tesla cars?
The answer is simple — what they are used to doing for the traditional carmakers in the USA, they do for other carmakers worldwide, not realizing that the North American car market is rather peculiar.
In North America, cars are sold from stock. In most of the world, it is not normal to sell large capital goods from stock. New planes, yachts, cars, machinery, or houses are ordered first, then built and delivered. For most of these goods, even the Wall Street analysts know they have to look at the order intake as the most important indicator of market and economy trends.
Philippe Houchois should have asked for monthly order intake and order book numbers, just like Boeing and Airbus are publishing. Those are the important numbers. More important than production and far more important than deliveries.
Not that I think Tesla is going to publish them, but at least he would have shown that he understands what he is talking about.
So, we were basically stuck, with Tesla reiterating why it is irresponsible to publish the monthly delivery numbers. Two days later, Wall Street is creating a panic using daily delivery numbers that have no relation to the FUD story Wall Street is peddling.
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