Our analysis suggests that the current version (v1.0) of Mobility on Demand (MOD) is more concentrated than investors think—8 cities account for more than 50% of all US revenue. Expanding beyond these areas requires the cost of MOD to become much more competitive (with private vehicle ownership) than it is today. We illustrate how difficult this will be… at least under the current, human operated model.
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This afternoon (03/14/19) KBRA Ratings was first on scene in issuing a very thorough Pre-Sale report on the Carvana 2019-1 ABS. Gracefully, they have allowed us to republish some of the data. But you can find the full report here. Overall though, the Carvana Pre-Sale is more supportive to our thesis than expected, given preliminary ratings and that the issuance includes a lot of the deep subprime loans that were likely previously going to an unnamed receivable purchaser (this concerned investors).
This afternoon (3/12/19) CVNA filed an ABS-15G for a due diligence report related to its first ABS - Carvana Auto Receivables Trust 2019-1. This is a massive catalyst that we have been waiting for, and candidly, it is occurring a year or two earlier than we were expecting (though we did find a hint in the 10-K). We think an ABS deal could serve as a double catalyst. First, it will significantly lower the funding cost of CVNA’s financing business. Second, IF the ABS is broad enough to include some of its Deep Subprime loans (Exhibit 5), it will fully dissolve a leading bear thesis that Carvana has been over-earning in its credit business with quasi related-party agreements.
We hosted Tesla IR Martin Viecha for two large group meetings in NYC: Even Tesla bulls have been shaken by the sheer volume of recent noise in the system. So, it was good to look management in the eye and hear that Tesla is selling every car they can produce. Short-term, lower pricing has positively impacted US demand and Europe / China deliveries are brisk. Long-term, demand sustainability isn’t an issue in our view, given the fact that Tesla’s many advantages have led to vehicles now priced below comparable ICE competition and $20k+ below EV competition.
After market close on Tuesday (3/5/19), NIO reported EPS loss of RMB 3.20 vs WRe of 2.16. Rev and gross margin were in-line, but higher R&D / SG&A (47% / 22% above WRe) led to a substantial earnings and FCF miss (for perspective, NIO raised about RMB 5bn in a recent Convert and burned RMB 3bn in qtr).
General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
Tesla announced Thursday (2/28/19) after market close that the long-awaited $35k Model 3 is now available in the U.S. No matter how you slice it, the Model 3 is now priced meaningfully below even base European luxury sedans, and not much above the overall US industry ASP of $33k.
Yesterday (2/27/19), after market close, CVNA reported Q4 results. Retail units grew 105% missing Cons by 8pts, while total $GP/unit of $2,131 missed Cons of $2,170. The FY 2019 retail unit guide was slightly below Cons but we think it was strong enough to satisfy investors given uncertainty around tax refunds. EBITDA margin guidance was 200bps below Cons at the mid-point, but we think that investors were bracing for a miss on margin guidance, and the guide still demonstrates significant leverage.
We expect the US Dept of Commerce to release a report this weekend asserting that automotive-related imports are a national security threat, thus authorizing the Executive branch to enact tariffs without Congressional approval under the Section 232 statute. We think actual tariff enaction is unlikely given widespread opposition from U.S. constituencies (Auto Dealers are politically powerful; even the UAW has not offered its endorsement). Nevertheless, general uncertainty during the 90-day post-report evaluation period could have stock implications: Slightly negative for U.S. Suppliers, negative for U.S. Dealers and Aftermarket Retailers, negative for non-U.S. OEMs, and neutral for U.S. OEMs.
The closing of NIO’s $650mln Convertible Note satisfies the $600mln in additional funding we believed was required to get to cash flow breakeven in late 2020 / early 2021. Additionally, the year-end cash balance disclosed within the Offering materials points to solid execution in Q4. The relative predictability of earnings through 2 quarters as a public company boosts our confidence in management execution. While a major demand catalyst is unlikely until a few months beyond the ES6 launch in April, we do see potential for modest positive catalysts ahead. We raise our 12/31/2019 price target to $9.00 from $7.80 and reiterate our Outperform.
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