Earnings: Too Late to Top Tesla

“…you are, like, on a trajectory of COGS per car going down 10% a year. So, that's probably, like, unheard of in the auto industry… it's a very normal performance in a lot of other manufacturing industr(ies) like microelectronics or consumer electronics.”

-??????? Pierre Ferragu, New Street Research (during the earnings call Q&A)

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Earnings calls are always something of a “Rashomon” moment where different listeners (and participants) may draw different conclusions from the same set of facts.? The media is less tolerant of disparate interpretations so the collective truth is usually rapidly arrived at and universally reported: Tesla missed analysts estimates for revenue, profit, and earnings per share; price cuts were to blame; the stock will take a hit.

On yesterday’s Tesla fourth quarter earnings call an affable Elon Musk, Tesla’s CEO, described the challenges facing the company in the coming year as it prepares to launch a vehicle (late in the year or in 2025) intended to open a new phase in the company’s strategy.? Arguably Tesla has tapped out the EV early adopter segment.

Together with the earnings misses, Musk’s warning of rough times ahead cast a pall over what would otherwise have been considered a not-unimpressive fourth quarter performance.? All companies face headwinds from time to time.

Tesla’s impressive looking fourth quarter profit was aided by $5.9B from a one-time tax benefit.? Musk explained his expectation of a tempering of growth in 2024 as the company prepares for its next pivot (the $25,000 Model 2?) even as it is still wrestling with the Cybertruck bone in its throat (more production hell?).

The less obvious, though overtly stated, message of the call was Tesla’s ongoing reformation of the automotive industry along the lines of the semiconductor and consumer electronics industries.? Denizens of those industries will be familiar with steady, predictable cost reductions delivered to consumers correlating with increases in performance.

Tesla has made cost reduction a foundational element of its vision extending from hardware to manufacturing.? Musk and his colleagues on the earnings call went to great lengths to explain how they have extracted cost from the supply chain and logistics.? Musk sounded like an old automotive purchasing hand as he described how pinching pennies can translate into billions of dollars.

We’ve heard these stories told about the legacy auto makers – how stingy car makers can be – and the legendary tales of car maker purchasing managers browbeating suppliers into perilous price cuts.? There is a disconnect, though, between the penurious reputation of auto makers and the actual prices of new cars.? Before, during, and after the COVID-19 pandemic new car prices have been on a steady and sometimes precipitous rise.?

With the increase in vehicle prices has come a decline in affordability, a lengthening of vehicle loan terms, and the inevitable growth in car loan delinquencies.? The media has seized on Tesla’s price cuts as a huge negative indicator – a message that is likely to resonate with precisely the opposite effect on consumers.

The typical car buyer today is looking at a growing number of vehicles with price tags north of $50K and even $100K – including, rather atypically, pickup trucks.? In fact, $100,000 pickup trucks have become the big red flag for many that new vehicle prices are simply out of control.

Meanwhile, Tesla is cutting prices.? More importantly, the company is redefining the revenue category known as “aftersales.”

For the typical auto maker 10%-15% of revenue (for internal combustion vehicles) derives from aftersales – within which lies 80% of profit.? Aftersales is the care and feeding of ICE vehicles after they are sold – deriving primarily from repair and maintenance.

Much of this profitable business is vaporized by the onset of EVs, which require precious little maintenance.? It’s just one of many reasons dealers are not fond of selling EVs.

Tesla’s aftersales is driven by sales of features and functions delivered wirelessly in software enhancements or service enablement and also, of course, from vehicle charging.? For the quarter, Tesla’s energy generation and storage revenue was up 10%; services and other revenue was up 27%.? For the year, those categories were up 54% and 37%, respectively.

The 14th largest vehicle maker globally by sales volume, Tesla charges its own cars and is now providing energy generation for his competitors who have, for the most part, adopted its connector.? This is game, set, and match for the industry.? It may be hard to see in a simple earnings call simply reporting the latest results which appear on the surface to fall short of expectations.? The bottom line is that this game is over - earnings miss, indeed.