TSLA Q1-CY23 Earnings Review

Revenues

A) Auto Sales: TSLA's car delivery volume grew by 36%, but revenue growth was reduced to 21% due to price cuts, resulting in negative gross margin growth at -17% YoY, which was slightly lower than expected. The impact of price cuts will continue to be felt throughout CY23, as Q1CY23 margins do not reflect the entire impact of price cuts. Elon Musk stated on the Q1CY23 call, "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. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy. So we do believe we're laying the groundwork here, and that 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 implies that TSLA will focus on gaining market share rather than maximizing profits, indicating that they may be open to further price cuts to achieve this goal. Elon's strategy is to profit from providing subscription software to TSLA users rather than profit from TSLA cars (hardware), similar to the classic razor blade profit model, but this model has no precedence in the car industry. Car buyers are not accustomed to paying for software/hardware features on a subscription basis. Additionally, FSD, a promised feature on a subscription model, does not seem to be fully functional at this time or in the near future. The market may penalize TSLA for lower margins in the near term while waiting for the broader subscription model to play out or at least until a fully functional FSD prototype is demonstrated.

B) Energy: While Auto revenue growth for TSLA is not as high as expected, Energy storage revenues are growing at a fast pace (148% YoY in Q1CY23), albeit from a low base. This growth is expected to contribute meaningfully over the next few years as it far exceeds Auto revenue growth. In addition, Energy gross margins are also growing, increasing their contribution to overall gross profits compared to cars. TSLA opened up Powerwall sales to anyone requiring a home power backup battery in March 2023, whereas previously, Powerwall batteries were only sold with the installation of a TSLA solar roof. With the ramping up of the Lathrop, CA Megapack facility, Powerwall is now the new home power backup solution offered to customers on a waitlist for the same. The Lathrop Megafactory has the potential to generate up to $20B in revenues once fully ramped up (approximately 20% of TSLA's 2023E revenues), but it is currently constrained by battery supply issues. If TSLA can address these supply-side issues, there is enough demand to support the Megapack business.

C) Services: The services segment of TSLA, which includes car insurance, is growing at a higher rate (44% YoY Q1CY23) than autos.

Although a rebound in sales in China after reopening could be a positive surprise to our estimates, we do not expect significant margin gains due to the highly price-sensitive nature of the Chinese market. Our estimates indicate a 31% CAGR revenue growth for TSLA between CY22-24.

EBIT

Due to price cuts, margins are expected to take a hit, with TSLA's gross margins on a path of decline. This will result in negative operating leverage, which will further hurt EBIT margins, as evidenced by the YoY decline of 17% in gross profit and 26% in EBIT in Q1CY23. TSLA's expansion of manufacturing facilities and increased spending on R&D means that it cannot reduce SG&A and R&D expenses in line with the decline in gross profit. As a result of this negative operating leverage, we estimate only a 6% CAGR EBIT growth between CY22-24, despite a 31% CAGR revenue growth over the same period.

EPS

TSLA is benefiting from increased interest income on its cash balance and lower taxes, which are expected to contribute to a compound annual growth rate (CAGR) of 8% for estimated earnings per share between CY22-24.

TAM

A) Auto: Tesla's ambitious target is to manufacture and sell 20 million vehicles annually by 2030, which is a highly challenging objective considering that they will only produce about 2 million cars in 2023. In our view, achieving sales of 7.5 million vehicles annually would be a remarkable accomplishment. In addition to this, Tesla plans to generate revenue by offering features like Full Self-Driving (FSD) to its existing customer base over time. Currently, FSD is sold as an add-on feature for a one-time charge of $14,000. Tesla's new plan is to introduce a subscription-based model for such features, which is an entirely new market. As car buyers are not used to pay-as-you-go subscription services, there is currently no Total Addressable Market (TAM) for it. However, if Tesla succeeds, it could lead to a paradigm shift in the auto industry.

B) Energy: Tesla's Powerwall, a home power backup battery solution, has faced supply constraints, resulting in consumer orders being backed up for months. With the ramp-up of the Megapack facility in Lathrop, CA, energy revenues could potentially surge to as much as $20 billion over the next few years, depending on how quickly the facility ramps up.

Risks

Perception and high investor expectations are a risk for TSLA. It's one of the only EV major in the western world that generates positive margins while producing competitively priced Evs at scale. Other EV manufacturers such as Rivian or Lucid are not even close to profitability while ICE majors don't generate profits on EVs yet. However, once investors are used to profitable operations, it would be difficult for them to see TSLA go down the path of reduced profitability even though it may be much better than other EV manufacturers. If TSLA reduces prices further to gain market share and/or maintain maximum production levels in a recessionary macro environment, it could be a difficult few quarters for TSLA's stock.

Valuation

Similar to other high-quality growth stocks, TSLA's stock valuation is a cause for concern. Presently, TSLA trades at a 39x CY24E PE multiple and a 2.3% TTM adj. CFO yield.

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