🚘 Tesla: Price Cuts & Margin Impact
Aiming for a larger fleet with the option value of autonomy-as-a-service
Greetings from San Francisco! 👋
Welcome to the new members who have joined us this week!
Join the 34,000+ How They Make Money subscribers receiving insights on business and investing every week.
Tesla (TSLA) reported its Q1 FY23 earnings last week.
It’s one of the most requested companies by the community, so we got you covered with another update!
Today, we’ll discuss the following:
Tesla Q1 FY23.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
We dropped a new video on the How They Make Money YouTube Channel, where we explore the secrets behind Tesla’s business model!
We'd love to hear your thoughts on this format in the comments. If you enjoy watching these videos as much as we enjoy creating them, you're in for a treat!
After slashing prices for the sixth time this year, Tesla revealed a 24% drop in Q1 profits compared to last year. With an increasingly competitive electric vehicle market, Tesla remains committed to increasing sales through lower prices. Aiming to produce 1.8 million cars in 2023, up from 1.3 million in 2022, Tesla's growth strategy perseveres in the face of declining profits.
The earnings report was the opportunity to look at recent developments:
The option value of autonomy.
So let’s dive in!
1. Tesla Q1 FY23
Tesla primarily makes money from selling/leasing electric vehicles (86% of revenue), followed by services (8%) and energy generation & storage (7%).
Auto revenue is impacted by the number of deliveries and the average selling price (or ASP for short). While the deliveries keep growing nicely, the ASP has dropped in the past year.
Total production 441K vehicles (+44% Y/Y).
Total deliveries 423K vehicles (+36% Y/Y), with Model 3/Y making up 97%.
Here is a bird’s-eye view of the income statement.
Data source: Shareholder Letter.
Revenue grew +24% Y/Y to $23.3 billion ($60 million miss).
Gross margin was 19% (-5pp Q/Q, -10pp Y/Y).
Operating margin was 11% (-5pp Q/Q, -8pp Y/Y).
EPS (non-GAAP) was $0.85 (in-line).
Auto revenue had a 21% gross margin (or 19% excluding regulatory credits), a 12 percentage point drop year-over-year.
Auto revenue included $0.3 billion from Full Self-Driving (FSD) in Q4 FY22, but no exact number was provided for Q1 FY23.
The other segments (energy and services) have a much lower gross margin profile (11% and 7%, respectively).
Tesla is very lean, with only $1.8 billion in operating expenses (8% of revenue), including $0.8 billion in research & development (3% of revenue).
The operating margin is a critical metric as it can demonstrate operating leverage—improving efficiency and profitability as the company scales. Tesla's margin profile (>14% in the trailing 12 months) still significantly outperforms the rest of the auto industry (around 8%). With recent price cuts, some margin compression is expected, but Tesla remains ahead of other automakers through:
Economies of scale achieved via its Gigafactories.
Zero advertising expenses with a focus on word of mouth.
Lack of intermediaries since Tesla relies on its website and showrooms.
Operating cash flow was $2.5 billion (11% margin, -11pp Y/Y).
Free cash flow was $0.4 billion (2% margin, -10pp Y/Y). More on that in a moment.
Global vehicle inventory (days of supply) was 15 (+400% Y/Y).
Cash, cash equivalent, and marketable securities: $22.4 billion.
Debt and long-term liabilities: $7.4 billion.
Tesla aims to grow production in line with its 50% CAGR target set in 2021, expecting around 1.8 million cars in 2023. With sufficient liquidity for expansion and innovation, Tesla focuses on maintaining a solid balance sheet and healthy operating margin. Cybertruck production is set to start at Gigafactory Texas later this year. Elon hopes for a delivery event in Q3 while progress continues on Tesla's next-gen platform.
On Monday, Tesla raised its Capex forecast for 2023 to $7 to $9 billion (compared to $6 to $8 billion previously). It includes $3.6 billion to expand its Nevada Gigafactory complex, with a 100 GWh 4680 cell factory and a high-volume Semi truck factory.
So what to make of all this?
Keep reading with a 7-day free trial
Subscribe to How They Make Money to keep reading this post and get 7 days of free access to the full post archives.