Is This a Red Flag for Tesla's Upcoming Q3 Deliveries Update?

Key Points

• Europe registrations fell in August, raising concerns about Tesla's third-quarter deliveries.

• BYD appears to have outsold Tesla in the E.U. last month.

• Investors shouldn't get their hopes up for a good Q3.

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Tesla (NASDAQ: TSLA) shares fell more than 4% last Thursday as investors digested disappointing Tesla vehicle registration data in Europe ahead of the company's third-quarter deliveries update expected in early October. The electric vehicle maker sells premium battery-electric cars and energy storage products globally, with meaningful exposure to the European market.

The market's question now is simple: Does the regional weakness point to a poor quarter, or is it mostly noise inside a broader and still-uncertain recovery?

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The latest Europe read was weak

News out Thursday showed Tesla's European Union registrations fell about 37% year over year in August to roughly 8,200 vehicles, marking a second straight month in which the China-based BYD outsold Tesla in the bloc. Including the broader European region (the U.K., Norway, and other EFTA countries), Tesla still led in absolute units for August, but registrations were down about 22% year over year, underscoring persistent pressure in the region.

This softness in Europe follows a tough second quarter for the electric car maker. In Q2, Tesla delivered just over 384,000 vehicles -- down 13% from about 444,000 in the year-ago period.

It is also worth recalling the company's tone on the latest earnings call. CEO Elon Musk acknowledged that the near term may not be smooth, noting that things could get "rough" before they get better over the next few quarters. While that comment doesn't guarantee weak third-quarter deliveries, it frames Tesla's headlines about European deliveries within management's own caution about the path back to growth.

Setting expectations for Q3

With only days left in the period when the August Europe data hit the tape, the right way to think about Q3 is probably through a conservative range, not a single-point guess. Start with what we know: Tesla delivered about 384,000 vehicles in the second quarter, it delivered roughly 463,000 in last year's third quarter, and outside Europe there are mixed but not universally negative signals. Some trackers have flagged improving weekly registrations in parts of Europe late in September, and several outlooks have pointed to steadier demand in China and the U.S., even as Europe stays choppy. Still, Europe's August decline argues for caution.

A reasonable, conservative estimate for Q3 deliveries is 430,000 to 455,000. The low end assumes Europe remains a drag through quarter-end and that China/U.S. improvement only partly offsets it. The high end assumes late-September sequential gains in key markets and typical quarter-end logistics help. That range sits close to widely cited expectations near the mid-440,000s and acknowledges both the seasonal lift from Q2 and the regional weakness that surfaced this week. For reference, landing near 445,000 would be down modestly year over year versus the roughly 463,000 delivered in last year's third quarter.

Of course, in the end, no one knows where deliveries will come from. Further, note that this is a conservative estimate. There's always a chance that deliveries could come in above this range (or even below).

Meanwhile, the stock's valuation doesn't help the bull case. At a market value well above $1 trillion and with a price-to-earnings ratio of 252 as of this writing, the stock embeds high expectations well beyond one quarter's deliveries. Such a high valuation leaves less cushion if third-quarter deliveries disappoint, or if commentary points to rough demand trends going into year-end.

Of course, there are some significant positives for investors to consider, too. Energy storage deployments remain a bright spot. Furthermore, a recent Model Y refresh, advancements in self-driving technology, and a planned upcoming vehicle launch could all contribute to increased demand in the second half of the year. But given this fresh data on Tesla registrations in the E.U., it's fair to say that risk sits a bit higher heading into next week's update.

The bigger story, anyway, will be a forward-looking one. Investors should look for any insight management provides on how quickly it thinks deliveries can reaccelerate. Because sales are going to need to pick up sharply at some point in order for Tesla's fundamentals to live up to its stock price.

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Daniel Sparks and/or his clients have positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.