• The company missed the top and bottom lines
• Earnings quality is worsening
• Wall Street is getting increasingly bearish.
Another quarter, another investor disappointment, despite not just strong
but record-high deliveries earlier this month. Revenue came in at $23.33B,
barely missing street estimates of $23.35B, up 24% year-on-year but down 4%
sequentially, the second-highest all-time. Adjusted earnings per share
(EPS) reached 85 cents also missed expectations (of 86 cents) and were down
21% on a year-over-year basis.
Certainly, the main driver of revenue growth was the many price cuts, six
in total this year, along with US government credits, all of which boosted
demand for Tesla’s EVs. However, top and bottom-line misses were not the
only issues; there was also gross and operating margin compression,
worsening quality of earnings, and negative free cashflow.
Price war & margin compression
Focusing on the company’s profitability margins, it is clear that the price
war for expanding market share came at the expense of lower margins.
Automotive Gross Margin (GM) was down to 19.3% (vs. 29.1% in Q1’2022) and
missed estimates of 21.2%. Tesla GM ex. credits dipped below 20%, missing
CFO Zach Kirkhorn’s forecast from last quarter that Tesla would be able to
stay above 20%. The question is how low will GM fall; since the beginning
of the year, we saw two price cuts, one in China and one in the US,
probably of around $1 billion. If you factor that in, next quarterly GM
might fall to 16-17%. That is what has driven the drop in the stock price
since the earnings announcement. Operating margins also nosedived
significantly to 11.4% from 19.2% on a year-on-year basis.
Tesla’s free cash flow (FCF) fell to $441 million, which was way under the
consensus estimate and down 80% year-over-year. Without the regulatory
credits this quarter, Tesla’s FCF would have been negative $80m, for the
first time since Q1’2020.
Credit sales totaled $521M in Q1 versus the Wall Street estimate of $275M.
This suggests a lower quality of earnings, given that regulatory credit
sales tend to be irregular and should not be considered part of the
long-term strategy.
The company is still optimistic about the future. Tesla expects to remain
ahead of the long-term growth rate of 50% and forecasts production at 1.80m
vehicles (vs. 1.37m in 2022). $TSLA is trying to ramp up production at a
45-50% rate, while demand growth is running at 35% at best. That is why
they are cutting prices; otherwise, the growth story would not play out.
This imbalance is causing order backlogs to dry up, and inventory to soar.
Tesla is trying to ramp up production at a 45-50% rate, while demand growth
is running at 35% at best – that is why they are cutting prices. Otherwise,
the growth story would not play out. This imbalance is causing order
backlogs to dry up and inventory to soar.
All of the above factors caused Wallstreet (WS) analysts to become quite
bearish for the past year cutting continuously lowering their 12m target
from over $300 to around $200.
The latest price cuts will drive further profitability margin compression
WS is likely to cut forward EPS to $3.7. At a 30-35x price-to-earnings
(P/E) multiple and only around 30% volume growth Tesla’s stock is most
likely stuck in $111-120 range for now.
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