To The Moon

Tesla's financial results for 1Q23 have been released, and I believe that most investors, including Tigers, are already aware of them. Judging by the share price, it seems that most investors have a negative sentiment towards Tesla's latest report, and I think this sentiment is justified.

Really bad 1Q23 numbers

On the surface, Tesla’s numbers appeared to be in line with expectations. The operating profit was $2,664 million, which was close to consensus’ estimate of $2,870 million. The earnings per share (EPS) were $0.85, which was also in line with Bloomberg's consensus of $0.87. However, upon closer inspection, it was found that 100% of the margin regulatory credit sales amounted to $521 million in the first quarter, which was significantly higher than consensus’s estimated $275 million. This type of credit sale tends to be volatile and is not considered a long-term solution, as other car manufacturers transition to electric vehicles and reduce their reliance on purchased credits. The increase in credit sales in the first quarter helped mask the impact of the 10% price cuts that Tesla implemented in late 4Q/early 1Q.

Despite this, the automotive gross margin still fell below expectations. Bloomberg consensus estimated that the automotive gross margin, including credits, would drop from 32.9% in 1Q22 to 23.0% in 1Q23. However, Tesla’s actual figure was even lower, at 21.1% in 1Q23, which was a significant decline of 1,180 basis points year over year! This also caused the adjusted automotive gross margin, which excluded credits and the impact of lease accounting, to fall below the 20% floor that management had set during the 4Q22 call in late January.

Continued Price cut is hurting profit…

During the call discussing the first quarter's results, Tesla management seemed to withdraw from the 20% margin floor, attributing half of the shortfall to one-time items, such as warranty expenses, and the other half to further price cuts implemented in 1Q, with additional price cuts in 2Q expected to lower the floor even more. Since March 31, Tesla has announced price cuts in several countries, which suggests that the company is focused on producing as many vehicles as possible, even if it means trading profits for sales. Instead of managing supply to meet demand at a stable price level to reach predetermined profitability targets, Tesla appears to adjust the price until demand equals the increasing supply from their factories in Germany and Texas.

Tesla does have a “demand” problem

During the 4Q call in January, Tesla denied having a "demand problem" and claimed that demand was much higher than supply. They stated that they could potentially exceed their 2023 delivery target of 1,800K vehicles and deliver 2,000K vehicles if they were able to build that many.

However, the additional price cuts announced in 1Q and 2Q without a corresponding increase in the 2023 delivery target, suggest otherwise. Additionally, inventory has been building up, which indicates that demand may not be as strong as management expected. This inventory buildup cost the company $1.5 bn of cash in 1Q, resulting in a free cash flow of just +$441 mn. This was far short of average analysts’ consensus estimate of +$2,644 mn heading into the quarter, and Bloomberg's consensus for +$3,463 mn.

Conclusion: Not a Buy for me

Despite some positive factors that make Tesla an attractive investment, such as its unique business model, impressive product range, and cutting-edge technology, the risks associated with execution and a valuation that may be overpriced outweigh these advantages. Given Tesla’s high valuation, the market seems to already price in the potential for expansion into mass-market segments, possibly beyond Model 3 and Model Y, and not to forget that the expansion into high-volume, low-price markets is risky in terms of demand, execution, and competition.

@Daily_Discussion @TigerStars