Tesla (NASDAQ:TSLA) has passed a stress test over the last two quarters. And, to the delight of investors, it passed the test. Unfortunately, despite a closer examination (which we will do in the next section), its scoring has some persistent flaws. However, despite a slew of problems in the first half of the year, including restricted production and shutdowns at its Shanghai facility for the whole quarter, continuous supply-chain interruptions, and increased labor and raw material costs, its June-quarter results exceeded forecasts. Despite these hurdles, revenue for the June quarter increased 42% year on year, and total deliveries reached over 255K (a 27% increase year on year). Management expects record output in the second part of the year.
TSLA has also proved its pricing prowess in the face of rising inflation. Later in the article, you’ll discover that the average unit sale price increased by nearly 10% from the previous quarter and by more than 16% from the fourth quarter of 2021. Customers are still flocking to acquire its automobiles as fast as they can be manufactured.
Such price, along with the robustness of its integrated manufacturing system, is a potent combination. Furthermore, its production has exceeded the critical scale’s pivot point. As the Gigafactories in Austin and Berlin continue to ramp up, I anticipate recouping its fixed costs at a quicker rate and benefitting from the scale of production to a greater extent, as discussed more below.
TSLA’s stress test
To establish the stage, it is evident that Tesla crossed the key scale pivot point around 2018. Since 2015, it has increased its profit per car while the unit price (i.e., the price of each vehicle) has been DECLINING. In 2015, the average price of a TSLA car was roughly $80.9K. (when one of my friends joked, it was like driving a piece of jewelry with limited range). As you can see, the average price fell to $57.5K in 2021, but net profits increased throughout the same period. And in 2018, the net profit went positive, indicating that the breakeven point had been reached.
Then there was the stress test in 2022. Due to the aforementioned issues, the company was forced to raise the unit pricing from an average of $57.5K per car in 2021 to $66.5K in Q2 of 2022, a 15.6% increase. It is undeniably fantastic news that the company has the pricing power to raise the price by such a large margin. The bad news is that the price rise is insufficient to cover the costs of inflation, raw materials, and so on. As a result, as demonstrated, the net profit per car declined. The average CFO per car peaked at $12.2K in 2021 before falling to $9.23K in Q2 2022, a drop of more than 25%.
Overall, it was a respectable scorecard with some remaining difficulties, which we will look at more next.
Profit and return predictions for TSLA stock
We can make predictions regarding TSLA’s future sales and profitability. The important parameters are A) a variable cost of $42,000 per car and B) a fixed cost of $2B. Finally, I assumed that: A) operating expenditures are 13% of total sales, comparable with current levels; B) it can sustain the existing average car price tag of $66,000 and C) yearly output grows at a 30% CAGR.
Based on these forecasts, as can be seen. Its overall income is expected to be around $188 billion. The forecast is close to the consensus estimate of $191 billion in 2026. Assuming that other independent methods derive the consensus estimates, such agreement is another strong indication of the soundness of the aforementioned model and fitting. And a basic grasp of its variable and fixed costs can provide valuable insights into its profit drivers and future returns.
For example, there is no question that the company is currently overvalued. However, with the aforementioned fixed and variable costs, the table illustrates that it can profit from increased production scale in the future. Total revenues are expected to reach $188 billion in 2026, with EBITDA profitability of $45 billion. At present prices, the price-to-sales ratio would be around 5.1x in 2026, the EV/sales ratio would be about 5.2x, and the EV/EBITDA ratio would be about 21x. By then, the P/S and EV/S ratios would be similar to the general market.
Final thoughts and risks
To summarize, I regard the last two quarters as a stress test for Tesla, which I believe it passed. After this test, there should be no debate regarding its profitability, production resilience, or pricing power. A few factors might raise its profitability more shortly. As the Shanghai Gigafactory starts operations and facilities in Austin and Berlin continue to ramp up, I anticipate it will recoup its fixed costs much quicker and gain even more from the production scale. In addition, its latest breakthroughs in full self-driving software provide further flexibility and upside possibilities for stockholders.
However, there are a few concerns that remain on its scorecard. First, the price rise alone was insufficient to offset increased costs. Despite an almost 16% rise in average sales price per car, profit per vehicle fell by more than 25%. Such cost-control difficulties (raw materials, labor, and general inflation) will likely exist in the future. Finally, it is difficult to foresee things that expand quickly, an inherent risk with nonlinear stocks like TSLA. TSLA management has consistently stated its ambition and confidence in increasing delivery at 50% yearly rates, but predictions from other sources vary widely.
Morning Star study, for example, forecasts Tesla would only produce roughly 5.7 million vehicles by 2030, far short of management’s ambition. On the other hand, Cathie Wood believes (or believes) that Tesla will be able to sell 20 million automobiles annually by 2025. The large disparity between the low and high ends of the consensus estimates demonstrates such volatility (and dangers). By 2024, the variation will be more than 2x, 3x by 2025, and over 4x by 2026.
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