Tesla Stock (NASDAQ:TSLA)
Tesla, Inc. (NASDAQ:TSLA) reported fourth-quarter earnings that exceeded expectations on both lines, which is good for shareholders. However, we will discuss some significant negatives in the report and forward guidance in this article.
What Happened?
On Wednesday afternoon, Tesla released its fourth-quarter earnings results.
The company increased its revenue by 37%, which was in line with or slightly ahead of estimates, depending on the source of the consensus estimate. Profit estimates were exceeded, by approximately 7%, which was a strong showing. However, investors should remember that the fourth quarter was not significantly impacted by price cuts, which is why profits could be under pressure in Q1 and beyond when major price cuts will have a greater impact on profitability.
There were some significant findings when delving deeper into the results.
Guidance
The first point to mention is Tesla’s forward guidance. For quite some time, the company has called for a 50% increase in annual deliveries over a multi-year period. While (some) bulls argue that this is easily achievable due to the overall growth of the electric vehicle (EV) market, (some) bears argue that maintaining a very high growth rate for an extended period is impossible due to the law of large numbers, which states that relative growth will eventually slow down.
According to Tesla’s most recent guidance statements from the Q4 report, they are abandoning the 50% -per-year goal, at least for the time being. In 2022, the company delivered 1.31 million vehicles; a 50% increase would result in 1.97 million vehicles being delivered this year. Tesla, on the other hand, has projected 1.8 million vehicle deliveries this year, which is far below the number of vehicles required to meet Tesla’s 50% growth target.
While the implied delivery growth rate of 37% remains strong compared to the average legacy player, it is significantly lower than what Tesla has achieved in the past. A downward trend in growth could undermine the bullish thesis and justify a substantially lower valuation. The lower valuation has already been achieved, to some extent, due to the share price compression seen over the last year.
Investors should be cautious regarding revenue projections for the current fiscal year. At constant sales prices, a 37% increase in deliveries would result in a close to 40% increase in revenue, assuming the price/mix remained constant. However, because Tesla has significantly reduced vehicle prices in recent weeks, sales growth will likely trail deliveries growth by a significant margin. Price reductions for US models ranged between 6% and 20%, while price reductions in China were comparable. If we assume that Tesla’s revenue per vehicle falls by 12% due to these price cuts, which is a reasonable base case assumption, revenues will grow in the mid-20s this year. That’s still a lot of power in absolute terms, but it’s a long way from what Tesla has done in the past. Significantly, this will lag behind the growth performance expected from Tesla’s main competitor, BYD (OTCPK:BYDDY, OTCPK:BYDDF), which is expected to increase revenue by more than 40% this year.
When Tesla continues to underperform BYD in terms of business growth after BYD has already surpassed Tesla in EV sales (when PHEV sales are included), Tesla’s position as the most important EV stock may be jeopardized — investors who are bullish on the EV industry overall may flock to BYD rather than Tesla in the future, especially since BYD is trading at a lower valuation (29x 2023’s expected net profit, versus 33x 2023’s expected
Based on expected delivery growth, the revenue growth assumption I presented above may result in some estimate reductions. Analysts currently forecast 28% revenue growth for Tesla in 2023. Still, based on the recently announced deliveries estimate, the analyst community may continue to lower its estimates – a trend that has been in place for some time:
Estimates for the coming quarters have been trending downward in recent months, with the decline accelerating in recent weeks. Until this downward trend stops or reverses, shares may face additional selling pressure as expectations are reset, and price targets are reduced – this year, the price target has already been reduced from more than $300 to $190, and more of the same could be on the way.
Investors should also consider what Tesla’s guidance implies for growth in 2023. Tesla produced 439,000 vehicles in the fourth quarter, a strong result. However, if production remains at this level for an entire year, we will have 1.76 million vehicles. Tesla’s guidance for 1.8 million vehicles this year implies that growth in 2023 will be very modest — around 2% relative to the most recent run rate level. In other words, despite the ongoing ramp-up of some of its factories and price cuts, Tesla’s guidance implies that growth versus all of 2022 will be very healthy, but growth versus the most recent quarter will be nearly nonexistent. I believe this is a major “problem” for the company that investors should not overlook.
Margins
Tesla’s margins are another important item from the earnings report. Tesla had a gross margin of 25.9% in the fourth quarter, which is not bad. However, the trend is negative:
The margin fell from 30.6% to 30.6% a year ago, a 470 basis point decrease. In other words, Tesla now generates 15% less gross profit per dollar of revenue than it did a year ago. And this was before the recent price cuts had a significant impact on Tesla’s margins; price cuts in China were announced at the end of the quarter, while price cuts in the United States were announced in the current quarter. With margins dropping by nearly 500 basis points in the last year, and by 200 basis points in a single quarter, investors should brace for further margin pressure in the near future, even before the major price cuts impact these metrics. All else being equal, this will hurt Tesla’s profits. Tesla’s margin performance is also noteworthy in comparison to its peers:
While Tesla’s gross margin has declined by 15% year on year [25.9%/30.6%], its peers have fared much better: legacy premium manufacturers Mercedes (OTCPK:MBGYY) and BMW (OTCPK:BMWYY) have reported +2% and -8% gross margin movements, respectively, indicating that Tesla has underperformed its legacy peers despite higher volume growth — generally, one would expect volume growth to lead to better margin performance due to improving economics of scale, but
Importantly, BYD, Tesla’s main competitor, increased its gross margin by an impressive 18% over the last year; with this EV player easily outperforming Tesla on the margin front, rising commodity prices, such as for lithium, are not a good excuse for Tesla, as BYD would be negatively impacted as well. Instead, it appears that BYD is executing better and has tighter cost controls. In contrast, Tesla appears to be losing tailwinds from unsustainable high prices that will not last forever as competition heats up.
Cash Flow
Investors aren’t buying Tesla stock because they want a dividend today, but a company’s cash flow is still important even if it doesn’t pay dividends. It indicates a company’s resilience to downturns and the quality of its earnings.
According to the earnings release, Tesla generated $1.42 billion in free cash flows during the fourth quarter. This equates to approximately $5.7 billion per year, for a free cash flow yield of 1.3% at current prices. Nonetheless, the free cash flow result was already boosted by a significant increase in Tesla’s accounts payables, which increased by $1.36 billion during the quarter, while accounts receivables increased by only $720 million. If AP and AR had increased by the same amount, free cash flow would have been significantly lower, at $800 million, or $3.2 billion annualized – a meager free cash flow yield of just 0.7%.
While reported profits are high, Tesla’s free cash flow is not. While one could argue that this is due to growth investments, the fact that Tesla is forecasting no meaningful growth in deliveries versus the Q4 run rate level through 2023 suggests that growth investments aren’t really paying off – at least, that’s how it appears to me right now.
Bottom Line
Tesla easily outperformed profit forecasts, which is a good thing. Aside from that, there were many negatives in the earnings report, such as weak delivery guidance. Despite significant price cuts, this could imply that there is a “demand problem.” Even before the recent price cuts have had a significant impact, margins are moving in the wrong direction. Last but not least, Tesla’s cash generation could be more impressive.
While Tesla stock is less expensive than it was a year ago, it has recovered significantly from recent lows. I do not find Tesla appealing right now, and the disappointing Q4 earnings report reinforces my belief that staying away for the time being may be the best option.
Featured Image: Freepik @ user6702303
