Tesla's Margin Squeeze: Troubling Sign Or Long-Term Opportunity?

seekingalpha2023-04-25

SummaryDue to strong macro headwinds, Tesla's price cuts were not as successful as anticipated in retaining the demand.In 2023, margin contraction will likely persist, but the primary focus should be ...

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Comments

lyj1999
2023-04-25
lyj1999
Ooo
romanc9
2023-04-25
romanc9
The point is, they don't only sell EV cars but also others biz under Tesla. Price cut is temporary. Increase mkt share is long term
- lyj1999:
  kk
Steamer
2023-04-25
Steamer
TSLA margin squeeze is every other EV manufacturers' bankruptcy.

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However, certain Tesla revenue streams are beginning to be macro-neutral and have a substantial impact on sales.Tesla's primary objective here is to increase market share for use in its next revenue stream - autonomy.Short-term volatility could make the stock very attractive.In my previous analysis, which focused primarily on the initial price cuts disclosed in the first quarter of 2023, I cited evidence from China that price cuts were effective and stimulated demand, but I was uncertain if the trend was sustainable. A deteriorating macro environment has its own effects on demand, which Tesla, Inc. (NASDAQ:TSLA) is attempting to combat by slashing prices further and sacrificing margin. Tesla's market share is not diminishing, but tightening conditions are causing demand pressures and a transient decline in sales. However, this trend may continue throughout 2023. In the company's presentation, I discovered a very significant and positive turning point. And this is due to the extremely significant increase in revenue from other segments, which is increasing the proportion of other contributors and making the business model more comprehensive. In spite of the fact that the automotive industry's margins could be impacted in future quarters, additional revenue sources distinguish it from its competitors and justify a higher valuation.Q1 2023 results reveal further margin compression issuesWhile there are some negative factors, confirming the negative sentiment after the release of Q1 2023 results, the truly encouraging signals are buried in the details. Seeking Alpha revealed that in the short-to-medium term leading up to fiscal year 2023, there is a high probability of further margin compression due to Model Y and Model 3's sixth price revision in 2023. In addition, as SA summarized:The Austin-based company generated $2.5B in GAAP net income during the quarter and $2.9B in non-GAAP net income. The electric vehicle powerhouse reported that it delivered 422,875 vehicles in Q1. The tally included 412,180 Model 3/Model Y vehicles and 10,695 Model S/Model X vehicles. The company produced 440,808 vehicles during the quarter. Operating margin came in at 11.4% of sales to fall from last quarter's mark of 16.0%. Higher raw material, logistics, commodities, and warranty costs were cited. Total GAAP gross margin was 19.3% vs. 29.1% a year ago, 23.8%% in the prior quarter and the consensus estimate of 23.0%. CFO Zachary Kirkhorn had stated previously that FY23 automotive gross margin should remain above 20% with average selling prices in the high $40K range.Tesla slightly fell short of revenue projections. Nonetheless, that is not the primary focus. The majority of inventors will likely continue to observe a decline in profit margins, as observed in recent quarters. Consider both the GAAP GP and the Adjusted EBITDA Margin. While Tesla may continue to lead in the margins, a clear downward trend can be observed. However, as the company continues to reduce prices, it is likely that the price reductions will continue despite the cost savings resulting from increased efficiency. The decline in margins could continue.Tesla - Automotive GP, GAAP GP, Adjusted EBITDA MarginHowever, as stated by management, they are now concentrating on volumes rather than margins. The demand issue is not unique to Tesla, but affects the entire industry. Also for this reason, many automakers have begun to reduce their prices. The entire industry will feel the effects of this macrocycle, and they are competing for every customer. In the coming weeks, we will find out whether the company's strategy is sufficient, but the initial round of price reductions had a positive impact. Without it, Tesla's overall production and delivery numbers would be substantially lower. However, as Tesla is in the top percentile of industry margin leaders, the worsening macro could harm other companies much more than Tesla.It is worth pointing out that the current macro environment remains uncertain. I don't think I'm telling anyone anything, I think people already know, especially with large purchases such as cars. And while we reduced prices considerably in early Q1, it's worth noting that our operating margin remains among the best in the industry. We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin.Tesla's CFO, Zachary Kirkhorn, emphasized that the company aims for a gross margin in the mid-20% range for any program it launches. The management does not wish to make any predictions, however, due to the extreme uncertainty. Firstly, the pure volatility of commodity prices, which affects the cost structure. CFO revealed some improvements in Q1 and thinks a positive trend in commodity markets, as well as some improvements in Q2. However, this is extremely uncertain. On the other hand, the Fed's monetary policy, by tightening conditions, could have a significant impact on the demand curve, as banks significantly tighten credit conditions for new loans and many clients will rethink their decision to purchase a car:I mean there's really two macro factors that are tricky. The biggest being the interest rate. 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. It makes cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So that's -- so it's just almost directly equivalent to a price increase, is there any kind of interest rate increase. And so like I said, if interest rates are really high, like they are right now, then in some cases, people can't get a loan at all.Banks continue to tighten, a negative sign for demandConsider the data from the Federal Reserve, or more specifically, the balance sheets of commercial banks, which report weekly balance sheet changes. The trend in auto loans (in billions) has begun to decline, and the year-over-year change is less than 0%. This trend will likely continue until the Federal Reserve eases monetary policy. Until a tail event occurs, nothing of this nature is anticipated in the near future. Therefore, from this perspective, this trend is not reversing to the bullish side, and higher negative demand pressures may persist in the future. As a result, price cuts in the auto industry as a whole may continue, as the ability of consumers to purchase a new vehicle and their cautious approach will have a negative impact on industry sales. The cyclical nature of the business model is nothing special.Commercial Banks Balance Sheet - Automobile LoansThe focus is moving towards increased market shareWhile the primary objective here is to gain as much market share as possible, there is likely more room for margin contraction. Tesla intends to generate revenue through autonomy and FSD. As Elon Musk stated during the earnings press conference:However, we expect our vehicles, over time, will be able to generate significant profit through autonomy. 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. This is an extremely important point.There has also been an announcement that Tesla's objective is to continue producing and selling as many vehicles as possible, despite an unstable macroeconomic environment, while management views this as an excellent opportunity to increase market share. As the release of Cybertruck draws near, as well as subsequent investments in in-house cell production, energy storage business, and the enormous potential of AI-enabled products, the scale outlook for the company's products appears to be extremely positive. This is something that rivals cannot provide.While the automotive segment is essential to Tesla's profitability in the near future, it may face substantial headwinds. However, Tesla began to perform exceptionally well in other revenue segments, such as energy, services, and others.Tesla - Automotive vs. Other revenues shareThe trend for the other revenue segment is solidly upward, while the automotive revenue share peaked in the fourth quarter of 2021. Since then, the growth rate of other revenues has accelerated significantly, reducing the overall market share from the automotive segment. This is an optimistic indicator for the future, as some revenue streams are becoming more macro-neutral and the product structure becomes more diversified. I added the revenues from energy generation and storage leasing, as well as services and other revenue, to this segment:after-sales vehicle servicessuperchargingretail merchandise and vehicle insurance revenueTesla - Revenues by segment (QoQ growth)I see a massive opportunity in the energy storage segment's continued positive growth, which is accelerating every quarter, as well as a tremendous opportunity in insurance services - eliminating the middleman and profit of incorporating insurance companies.Nevertheless, I believe that all of Tesla's other segments are rapidly growing and sustainable, as is the automotive segment. This market segment will likely never be surpassed, as Tesla is currently prioritizing volume over margin in order to deliver as many automobiles as possible in a way to profit from the additional revenue stream, FSD, which is currently a hidden gem and in its early stages. I believe this with tremendous potential. From this perspective, there is a small chance that another segment will outperform automotive revenues, but the overall business is growing very strongly. Insurance and energy revenue contributors are much more macro-neutral (less cyclical and more stable) than the automotive industry as a whole. That is something that competitors can only dream about.Summary and risksWith these products, Tesla has a fantastic combination of automobile, energy, insurance, and technology, resulting in much higher and premium valuations than its competitors. All of these additional services and planned product expansions are features that competitors lack and do not develop (energy, insurance and FSD). From this perspective, Tesla is a highly innovative and rapidly growing company. I believe that the auto industry will face additional headwinds, which could significantly slow down its production and deliveries below analysts' estimates for FY 2023. It may desire further margin compression, which could cause the valuation to return to somewhat more normalized terms and the stock price to decline in the near future. Nonetheless, I see substantial potential in the business model's long-term viability, despite the fact that this potential is difficult to predict.As previously mentioned, banks' tightening conditions could lead to a decrease in overall demand, making it difficult for other automakers to compete with Tesla, the industry's primary margin leader. In FY 2023, the auto industry as a whole will likely be under additional pressure, allowing for increased short-term volatility. Nonetheless, I believe that such volatility can result in substantial discounts, similar to those seen in recent days (-10% or more), which could be a fantastic long-term buying opportunity.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":9947935440,"gmtCreate":1682437579681,"gmtModify":1682437583632,"author":{"id":"3583137839879179","authorId":"3583137839879179","name":"lyj1999","avatar":"https://static.tigerbbs.com/5d7368738bf169cbe1003cad31acb204","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Ooo","listText":"Ooo","text":"Ooo","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":14,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9947935440","repostId":1142334515,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9947901363,"gmtCreate":1682416324353,"gmtModify":1682416329638,"author":{"id":"4102495020619380","authorId":"4102495020619380","name":"romanc9","avatar":"https://static.tigerbbs.com/76bfe37245defa055adfff7453f1520f","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":2,"crmLevelSwitch":1},"htmlText":"The point is, they don't only sell EV cars but also others biz under Tesla. Price cut is temporary. Increase mkt share is long term","listText":"The point is, they don't only sell EV cars but also others biz under Tesla. Price cut is temporary. Increase mkt share is long term","text":"The point is, they don't only sell EV cars but also others biz under Tesla. Price cut is temporary. Increase mkt share is long term","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":21,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/9947901363","repostId":1142334515,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":106334300,"gmtCreate":1682437584873,"gmtModify":1682437597537,"authorId":3583137839879179,"author":{"id":3583137839879179,"authorId":3583137839879179,"name":"lyj1999","avatar":"https://static.tigerbbs.com/5d7368738bf169cbe1003cad31acb204","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9947901363,"type":1,"supId":0,"prevId":0,"content":"<u>kk</u>","text":"<u>kk</u>","html":"<u>kk</u>"}],"langContent":"EN"},{"id":9947909435,"gmtCreate":1682414405727,"gmtModify":1682415392223,"author":{"id":"4139723207007242","authorId":"4139723207007242","name":"Steamer","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"TSLA margin squeeze is every other EV manufacturers' bankruptcy.&nbsp;","listText":"TSLA margin squeeze is every other EV manufacturers' bankruptcy.&nbsp;","text":"TSLA margin squeeze is every other EV manufacturers' bankruptcy.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":18,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9947909435","repostId":1142334515,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":61,"commentSize":0,"repostSize":4,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1142334515"}