Tesla (TSLA) surged almost +11% day after results (27 Jan) after reporting Q4 2022 earnings (26 Jan) after market close.
Tesla beat on both revenue and EPS, but guided for less than 40% growth for 2023 vehicle deliveries of 1.8M cars.
Read: Tesla $1.19 vs $1.13 estimate. Revenues beat expectations as well
Focus on costs
In the Shareholder Deck and on the conference call, my main takeaway was that Tesla management is focused on driving down costs. In view of the short-term impact of macro uncertainty and rising interest rates, Tesla’s response is to accelerate their cost reduction roadmap which would also reduce the impact of price cuts on margins. Tesla management also clarified their focus will primarily be on operating margins (i.e. not just gross margins which the market was focused on).
As average selling prices (ASP) continues to decline, Tesla’s operating margins have been increasing as they drive costs down by introducing lower cost models, most efficient factories, vehicle cost reduction, and operating leverage. Smoothing of deliveries and less focus on end of quarter deliveries push will also help to reduce logistics and expediting costs.
Demand concerns
Investors were naturally most concerned with demand, with questions around whether the price cuts were successful in stoking demand. Tesla dispelled demand fears by sharing that orders have been pouring in since the price cuts at roughly twice the rate of production. In response, Tesla raised Model Y prices slightly.
Recession risks are not lost on Tesla though. Tesla warned that the overall auto market is expected to contract. However, they reiterated Tesla’s mission which is to accelerate the world’s transition to sustainable energy. That would require affordable EVs especially for the price-sensitive mass-market consumers. So, Tesla needs to continue to drive costs and prices down, while ensuring margins and profitability for the viability of the business.
Looking ahead
- Details of next generation platform to be shared at Investor Day on 1st March 2023
- Cybertruck production by end 2023
- Semi deliveries (started Dec 2022) and production ramp
- More details of new Gigafactory Nevada
Valuation
As of the latest financial numbers, TSLA is now trading at 44x P/E and 6.2x P/S. Share price has fallen dramatically but revenue and earnings have grown rapidly over the past year.
Most analysts on TipRanks rank TSLA a buy and have an average 12-month PT of $186 (16% upside). Personally, I’m tending toward the high end of analysts PT ~$300.
My thoughts
Tesla management is sending a clear message or reminder about Tesla’s mission and how their recent actions are aligned with that. During the pandemic, Tesla and most other durable goods manufacturers had to raise prices in response to higher inputs costs due to higher raw materials costs and supply chain disruptions. As commodity prices come down and supply chains smoothen out, Tesla can and will continue to innovate to drive down costs and pass on those cost savings to end consumers in the form of lower prices.
There’s little doubt that Tesla will be able to weather a potential recession, even a severe one. Tesla has a strong balance sheet, lots of FCF, no debt, and cash pile of $22.2B. Tesla is past the point of being worried about bankruptcy, but the CFO is still prudent in prioritising capital allocation properly across the various capex and R&D needs to fuel growth.
Elon Musk and Tesla management are focused on their mission and the long-term potential of Tesla, but also taking prudent steps to protect the business against short-term uncertainty. That definitely gives me confidence in Tesla’s prospects. That said, Elon Musk also conveyed that he is not concerned about share price in the short-term.
Personally, I’m as bullish on Tesla as ever. In my opinion, the path for Tesla to grow is clearing up and risks are abating. I’ll be looking for opportunities to add to my long-term position in TSLA in the Family Portfolio, but I won’t be in a rush in view of macro uncertainties. In the short-term, I think there will still be better opportunities to accumulate more TSLA shares at discount since we’re not out of this bear market yet, and I will take my time to DCA. As for my Personal Portfolio, I’ll be looking to trim and take some profits off this rally post-earnings.
Read my investment thesis on Tesla and my Portfolio.
What do you think about Tesla’s earnings? Will you be buying, selling, or holding?
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