My family used to say I had an obsession with Tesla and Elon. I bought a Model 3 as “investment research.” Not to mention it was safe, cool, and it seemed the good folks were making a difference for once. I have written many pieces supporting Elon and Tesla’s vision for a sustainable planet against the dark forces of unsustainable fossil fuel exploitation when things seemed bleak.
Yet, I’ve drifted away from Tesla and Elon over the last 18 months. The politics, the lawsuits, the greed, the corporatism, it became the same old, same old that I’ve cynically seen elsewhere. It takes a gargantuan level of hypocrisy to champion for a sustainable planet and align yourself with the very forces wanting to burn everything to the ground for more power and more money. Elon is the face of Tesla. What Elon says and does reflects how Tesla is perceived. Which is a pity when Elon promotes conspiracy theories, disinformation, and cozies up to people like Tucker Carlson. That diminishes Tesla’s mission and all the hard work people do at Tesla. Elon on yesterday’s earnings call, reading the transcripts, sounded sane without a social media filter attached. It’s that Elon I supported and championed. It’s that version of Tesla I wanted to see succeed. Hero worship is fraught with the risk that your heroes end up being ordinary with ordinary weaknesses, warts and ugliness revealed.
Here are the two links I will be referencing through this piece as I examine Tesla’s latest quarter. I hope to write about Ford, GM, and BYD soon.
Tesla, Inc. (TSLA) Q1 2023 Earnings Call Transcript
TSLA the stock may be overvalued in the short term. My prediction, before two more rounds of Tesla price cuts in April, said that Q1 gross margins would fall, based on the severity of the price cuts and the lack of corresponding increase in sales to make up for the shortfall. Investopedia notes Availability of Substitutes, Urgency, and Duration of Price Change all impact the Price Elasticity of Demand. We’ll examine all three in relation to Tesla’s earnings.
Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price
Investopedia
Tesla the company is now a $100 billion per year manufacturing giant annualized. There are credible plans to grow vehicle and stationary energy sales. There are credible actions in place to continue reducing costs and increase scale. All of this is good for moving to a sustainable economy. We can consider Tesla the company as an option’s bet, with certain projects with low chances of success but huge profit potential. The Law of Large Numbers comes into play when you deal with sums like $100 billion dollars. At that level, it’s hard to grow. Growth rates diminish. That’s expected.
Tesla’s own YoY revenue growth rate chart shows Q1 growing at close to 40%. The actual revenue numbers from page 4 show YoY Total Revenue increased by 24%. The last point in the chart for Q1 2023 should show a deeper dive. We can see growth rates have been slowing down from Q1 2022. The automotive business grew revenue 18% year over year. Growth rates were pulled higher by Services and Energy generation and storage.
Wait… you might ask how did Tesla’s revenue go up but earnings went down? Great question. From page 4, operating expenses were down 1% YoY, which is impressive for a fast growing company. Page 23 shows Total cost of revenues increased from 13,296 to 18,818 from Q122 to Q123. Total revenues went from 18,756 to 23,329. If you do the math, cost of revenues went up more than revenues. In % terms, cost of revenues went up a greater % than revenues (41.5% vs 24.4%). Which explains why operating margins dropped from Q4.
Operating margin is noted as 11.4% on page 4, again a steeper dive than shown above. 11.4% is slightly above the Auto Industry in Q4. Tesla sold more vehicles balanced against each vehicle costing more to produce, specifically from under utilization of new factories.
One of the charts that caught my attention was free cash flow for the quarter.
Free cash flow was noted as $441 million on page 5. Automotive regulatory credits were noted as $521 million on page 23. That means free cash flow would have been negative for the quarter excluding credits.
Notable things on the earnings call
- Elon: Model Y became the best-selling vehicle of any kind in Europe and the best-selling non-pickup vehicle in the United States.
- Elon: So we do believe we’re like laying the groundwork here, and then it’s better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy. (Note: willing to slash profits now to make a bet they make more on autonomy later on. Or lower profits now and higher profits later, which when you discount back to the present, means Tesla is worth less).
- Elon: Cybertruck delivery event in Q3 (Note: Elon later clarifies around end of Q3)
- Elon: Our energy storage deployment reached nearly 4 gigawatt hours in Q1. (Megapack)… There’s still some way to go to reach the [Indiscernible] rate of 40 gigawatt hours per year.
- Elon: Dojo can become sellable service and potential for order of magnitude improvement in the cost of training
- FSD Beta crossed 150 million miles
- Elon: In conclusion, we’re taking a view that we want to keep making and selling as many cars as we can.
- ZK: Note that Q1 was our third quarter in our multi-quarter plan to move to a more regionally balanced mix of build and deliveries. As I’ve mentioned previously, this results in lower deliveries and production within a quarter due to a higher volume of cars in transit at the end of the quarter and has an associated impact on quarter-ending free cash flows. This was particularly prevalent in Q1 for S and X as we begin exporting cars for international deliveries. (Note: Continues move to balance deliveries through quarter, S and X exporting internationally).
- ZK: This business is growing as a percentage of the businesses of the company’s revenue and reached its highest level yet in Q1, driven by an increasing rate of deliveries for our Megapack products. We are also making progress on storage profitability, generating our highest gross profit yet in the quarter. (Note: Follows up on what Elon said on growing Energy Storage to 40 GWh a year).
- ZK: Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses. We plan to continue to invest heavily into our future plans, which include the Cybertruck next-generation platform, in-house cell production, energy storage business and our autonomy and AI-enabled products.
- Q: How frequently do you review pricing? ZK: We review where we stand globally on a weekly basis and certainly, I can’t get into the details of the reasons why certain decisions are made.
- Elon: Tesla Energy to be bigger than auto on total gigawatt hours deployed (Note: This clarifies previous calls that energy would be bigger than vehicles.)
- Drew: Gave a bunch of detailed info on 4680 cells, reduction in costs, ramp up time, and production scaling. Some interesting notes on their simple, cheap process to get lithium carbonate.
- Lithium prices have dropped a lot. Tesla at maximum pain point for commodities in current cost structurez
- Elon: Expects to open up new auto markets around the world to expand Shanghai exports
- Elon: But the trend is very clearly towards full self-driving, towards full autonomy. And I hesitate to say this, but I think we’ll do it this year. (Note: Elon has been saying that since 2017. He notes progress is happening elsewhere in the call).
- Karn (VP, Supply Chain): Lithium carbonate prices have softened from $85,000 a ton six months ago to 26% of that today.
- Elon: We’re building our lithium refinery capability at Corpus Christi and our cathode refinery outside Austin.
- ZK: About the other half of the miss in Q1 was attributed to things that are nonrecurring. So I mentioned these in my opening remarks. It’s a warranty adjustment for cars that were previously produced but not part of the pedigree of cars we’re building now and some autopilot-related deferrals as we make some technology changes here that this deferral should get recognized once some of the software catches up. (Note: Zach K answering a question why gross margins went below 20%. Zach K can get going on on a coherent answer. Kudos to him.)
- Elon: So if there’s a very high Fed rate or interest rates are very high, that is — every time the Fed raise the interest rates that’s equivalent to increasing the price of a car.
- Then the other factor is whenever there is uncertainty in the economy, people will generally postpone new — big, new capital purchases like a new car. (Note: Elon alludes to Duration of Price Changes and Urgency from our Price Elasticity discussion).
- Elon: So we’re adjusting course – and we’re thinking about it literally every day, seven days a week. Every seven days, we collect that e-mail and so is the rest of the team. (Note: regarding how frequently they look at prices to manage demand vs supply).
- Drew: So as you may have seen, we opened our first V4 post in Europe and our Magic Dock post in North America in Q1.
- Drew: For example, in Europe, 50% of all of our supercharging stations are open to all EVs, and we’ve been able to do that without any increase in wait times at all for anybody.
- ZK: And I think that what happens to margins over the next couple of quarters that only matters in the context of what that means for our ability to reinvest into 2024 and 2025.
- ZK: And we have a lot of space before that becomes something that we have to revisit our investment plans.
- Karm: Certainly, we want all EVs to succeed, too. We just want to say that we’re not like some malicious attacks to try to destroy everybody.
- Elon: So – but I think it is helpful to have the feedback loop with a service because that means we feel the pain of service, and then we can address the design to make the car need less service. And I think that gives us the right incentive structure, like because the best service is no service. The car doesn’t break.
- Elon: And so the only way to actually succeed for a newcomer to succeed is to have a product that is so compelling that people are willing to pay a premium over the incumbent product. And in the absence of electrification and autonomy, I don’t think a newcomer can succeed. (Note: pay attention EV newcomers)
Conclusion
There was no mention of the Roadster on the call. No mention of the Semi. No mention of the solar roof. No mention of solar. Barely a mention of Tesla Insurance or the ease at which Tesla cars get totaled. Forget captive body shops or ease of repairs. Tesla is a vehicle, energy storage, and energy distribution company, with outsized bets on autonomy, software and AI. The relentless drive to be better is key.
If you crash current margins for an indefinite higher future margin, discounting back, the stock is worth less. Wall St recognized that fact and adjusted TSLA’s stock price lower. True FSD has a way to go. Elon repeated on the call FSD had a good chance to happen this year, as he has every year. I’m not a believer it happens in the next 5 years. Zach K, CFO, seems to believe it happens soon.
On the last element of price elasticity, substitution, competition is keen in Europe and China. It’s building up in the US. Good outside models will decrease Tesla’s price elasticity. Will an expensive Cybertruck, a hall of famer as Elon said, bring back Tesla’s growth rates? Probably not, but it should be good for margin. Tesla will be facing tougher YoY comparisons next year. Semi, Cybertruck, an updated Powerwall, and Megapack will have to satisfy those looking for new products over the next 12 months.
On the Model 2 platform, Tesla has to be careful not to Osbourne its only 4 vehicles. They have enough cash to invest for future growth and products while they get through this lull.
On price reductions, I expect more from Tesla. Fed is raising interest rates, some product / political fatigue seems likely, and deflation has a dangerous tendency to make people wait for lower prices. Our new Standard Range Model 3 has gone down in price $4k since we bought it 24 days ago. Excess depreciation and hurting previous owners doesn’t build customer loyalty. In fact, they repel it.
I’m most optimistic about Energy Storage and Services this year. Both are growing faster than vehicle sales, and both generate positive gross margins.
https://finance.yahoo.com/news/tesla-coming-crash-7-analysts-190554730.html
This person makes a good case why Tesla is worth closer to $26 (I disagree with that number).
On the other side, Cathie Wood says
Tesla can be worth $2000 in 2027 (I strongly disagree with that number, implying Tesla would be worth more than 5 trillion in 5 years. That’s Saudi Aramco kind of value, which will go down as peak oil hits harder).
Somewhere between $26 and $2000 is Tesla’s current worth. My bet (I have a few, small dollar, bear call spreads on Tesla expiring next month) is the price stays where it is or goes lower until May. The last time we probably saw a big company with over $100 billion in revenue act like a startup was Amazon. The same Amazon that gave birth to AWS, which is now Amazon’s big money maker. Some of Tesla’s current value is an option that one of their big bets pays off. Some of that diminishing current value is having Elon take business risks that few others would dream of taking.
It’s always entertaining with Tesla and TSLA, the ultimate meme stock with a very serious company at its core.
Thanks for reading.
Sincerely yours,
smilingdad
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