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🚘 Tesla: Supercharging The Future
Cybertruck demand is "so far off the hook that you can't even see the hook"
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Tesla (TSLA) reported its Q2 FY23 earnings this week.
It’s one of the most requested companies by the community, so we got you covered with another update!
Today at a glance:
Tesla Q2 FY23.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
Don’t forget to check out our YouTube Channel, where we dive into the secrets behind Tesla’s business model. If you enjoy watching these videos as much as we enjoy creating them, you're in for a treat!
Amid a challenging economy and a highly competitive EV market, Tesla has been strategically lowering its prices to adapt to shifting demand. However, this approach has resulted in a decrease in profit margins.
Elon Musk explained during the call:
"The short-term variances in gross margin and profitability really are minor relative to the long-term picture. Autonomy will make all of these numbers look silly.”
The strategy is clear. Musk is willing to sacrifice margins today for improved margins tomorrow, primarily driven by software upsell. Tesla is still on track to produce 1.8 million cars in 2023, up from 1.3 million in 2022. So the growth trajectory is intact, albeit with thinner margins for the time being.
The earnings report was the opportunity to look at recent developments:
Price cut impact.
Margins beyond autos sales.
The rise of Dojo compute power.
Supercharging and potential FSD licensing.
So let’s dive in!
1. Tesla Q2 FY23
Tesla's main revenue stream comes from selling or leasing electric vehicles, accounting for 85% of overall revenue. Services make up 9%, while energy generation and storage make up 6%.
Their car sales are driven by the number of deliveries they make and the average price they sell each car for. Although deliveries continue to increase, the average selling price has dipped over the past year. So the revenue is not growing as fast as deliveries.
Total production 480K vehicles (+86% Y/Y).
Total deliveries 466K vehicles (+83% Y/Y)
Here is a bird’s-eye view of the income statement.
Revenue grew +47% Y/Y to $24.9 billion ($200 million beat).
Gross margin was 18% (-1pp Q/Q, -7pp Y/Y).
Operating margin was 10% (-1pp Q/Q, -5pp Y/Y).
EPS (non-GAAP) was $0.91 ($0.09 beat).
Other points to note:
Auto revenue had a 19% gross margin (or 18% excluding regulatory credits). It was 28% a year ago and 21% in Q1.
Auto revenue included $0.3 billion from Full Self-Driving (FSD) in Q4 FY22, but no exact number was provided ever since.
The services segment saw its gross margin improve to 8% (+4pp Y/Y, slightly up Q/Q).
The energy and storage segment significantly improved its gross margin from 11% to 18% annually and quarterly, matching the auto segment.
Tesla is keeping things lean with only $2.1 billion in operating expenses (8% of its total revenue). This includes $0.9 billion in research & development (4% of its revenue).
While margins have been squeezed recently due to price cuts, Tesla continues to lead other car manufacturers because of the following:
Scale: Gigafactories allow it to produce more cars and thus spread out its costs.
Marketing: Tesla doesn't spend on advertising and relies on word of mouth.
Direct-to-consumer: Through its website and showrooms.
The operating margin is a critical metric as it can demonstrate operating leverage—improving efficiency and profitability as the company scales. Tesla's operating margin profile (close to 13% in the past year) remains well ahead of the rest of the auto industry (around 8%). And these margins are positioned to expand through software solutions/upsell.
Operating cash flow was $3.1 billion (12% margin, -1.5pp Y/Y).
Free cash flow was $1.0 billion (4% margin, +0.3pp Y/Y).
Global vehicle inventory (days of supply) was 16 (+300% Y/Y).
Cash, cash equivalent, and marketable securities: $23.1 billion.
Long-term debt: $0.9 billion.
Tesla aims to grow production in line with its 50% CAGR target set in 2021, which would see it producing around 1.8 million cars in 2023. Meanwhile, the company focuses on maintaining a solid balance sheet and a healthy operating margin.
So what to make of all this?
Revenue was impacted by $0.6 billion of currency headwinds. So the top line improved by +51% Y/Y on a constant currency basis.
Energy generation & storage revenue was 1% down sequentially after a massive jump in Q1 FY23. It was still up +74% Y/Y.
The company is prioritizing volume and fleet growth. This strategy hurts margins in the short term, but management expects it to generate significant profit over time through autonomy (full self-driving monetization).
As a result, the gross margin was at its lowest in two years (but still outperforming other automakers).
Deliveries still align with a 50% compound annual growth rate since 2020. That translates into a +37% growth Y/Y in 2023. To illustrate, let’s rewind and look at the deliveries since 2020:
2021: 936K (+87% Y/Y).
2022: 1,314K (+40% Y/Y).
2023: ~1,800K forecasted (+37% Y/Y).
Auto gross margin will continue to be negatively impacted by price cuts and investments in Austin and Berlin. Management will be focused on the operating margin to keep a holistic view of the business.
Several factors impacted operating income:
Lower credit revenue.
Negative fx headwinds.
Cost of production ramp of 4680 cells.
Cybetruck, AI and other significant project expenses.
All partially offset by lower cost per vehicle and energy margin improvements.
Free cash flow was up +62% Y/Y to $1.0 billion despite $2.1 billion of capital expenditure (+19% Y/Y) and the challenging macro.
Is the business sustainable?
Tesla's management asserts that the company has ample liquidity to finance its product roadmap, long-term capacity expansion, and other expenditures.
The fact that the company can maintain positive free cash flow in the current macro environment is encouraging. In addition, Tesla's margin profile stands to benefit as software-related profits (primarily from Full Self-Driving) supplement hardware earnings.
2. Recent business highlights
Price cuts in a challenging macro: Tesla has pioneered a dynamic pricing strategy, adjusting its prices according to real-time internal data. Price reductions primarily reflect a more challenging economic environment and increasing competition. We discussed this in our coverage of Q1 FY23, and Q2 was a continuation.
Supercharging the EV market: Several automotive companies, including Ford, GM, Mercedes, Nissan, Polestar, Rivian, Volvo, and Electrify America, have announced that they will adopt NACS—Tesla’s charging standard—for their North American products. This could accelerate the transition to EVs and boost the growth of Tesla’s charging network.
Market share: Tesla continued to gain market share in Q1 FY23, reaching 4% in North America and accelerating in Europe.
Autopilot and Full Self-Driving (FSD): Musk said Tesla crossed over 300 million miles driven by FSD beta. The chart below illustrates the cumulative miles driven in FSD beta, which shows acceleration as more drivers test out the FSD feature. If that’s not a hockey-stick growth, I don’t know what is!
The rise of Dojo compute power: Tesla has begun the production of Dojo training computers, aimed at augmenting the neural net training capacity to support the Autopilot team. By early 2024, the company expects Dojo's compute power to rank among the top five worldwide. This move leverages Tesla's data advantage with the FSD beta.
3. Key quotes from the earnings call
Elon Musk on the macro and the temporary margin hit:
“One day it seems like the world economy is falling apart, next day it's fine. I don't know what the hell is going on. We're in, I would call it, turbulent times. […] I think it does make sense to sacrifice margins in favor of making more vehicles”
“We continue to build our release candidates of the Cybertruck on our final production line in Austin. […] Demand is so far off the hook, you can’t even see the hook.”
On the Supercharging network:
“Our global Supercharging network now stands at […] roughly 50,000 connectors and over 5,000 locations. As I think a lot of people are aware, the Tesla Charging Standard, which we made open source and it’s now called the North American Charging Standard. We’re deeply honored that Ford, GM, Mercedes and many other OEMs have signed up to use our connector and gain access to our charging network. We strongly believe in helping other car companies to accelerate the EV revolution and just trying to do the right thing in general.”
On licensing FSD:
“We are very open to licensing our full self-driving software and hardware to other car companies. And we are already in discussions with -- early discussions with a major OEM about using Tesla FSD. So, we’re not trying to keep this to ourselves. We’re more than happy to license it to others.”
This could drive additional non-auto revenue in the future. For now, though, let’s keep in mind that Tesla is under regulatory scrutiny after crashes involving the use of FSD.
On Autopilot training and autonomy:
“Tesla has more vehicles on the road that are collecting this data than all of the companies combined by, I think, maybe even an order of magnitude. […] The success in AI endeavors is a function of talent, sort of unique data and computing resources. And we have outstanding capabilities in all three arenas..”
On Dojo computer’s potential:
“Our Dojo training computer is designed to significantly reduce the cost of neural net training. It is designed to -- it’s somewhat optimized for the kind of training that we need, which is a video training. […] We expect to use both, NVIDIA and Dojo, to be clear. […] And we think we may reach in-house neural net training capability of a 100 exaflops by the end of next year.”
On the recent FSD milestone:
“To date, over 300 million miles have been driven using FSD beta. That 300 million mile number is going to seem small very quickly. It’ll soon be billions of miles, then tens of billions of miles. And FSD will go from being as good as a human to then being vastly better than a human. We see a clear path to full self-driving being 10 times safer than the average human driver, so.”
CFO Zachary Kirkhorn on price cuts and focusing on long-term cash flow:
“We don’t control interest rates. We don’t control macro consumer sentiment. But we have an obligation to be responsive to that to ensure that we’re matching supply and demand and keeping things balanced. And so, this is how we’re managing the next handful of quarters. Soon enough, these quarters will be behind us. They won’t be part of the present value of future cash flows of the business. And so, we want to make sure we keep that view and make sure that the long term business is exactly the way that we want it to be.”
4. What to watch looking forward
It’s all about the long-term
Tesla's long-term growth is fueled by several key opportunities currently in motion:
4680 battery advancements: Tesla's innovative 4680 batteries, due to their larger size and enhanced energy density, have the potential to streamline design, improve vehicle range, and reduce costs. As costs go down, Tesla will be able to offer its cars at a more affordable price and expand its market. 4680 cell production increased by 80% sequentially in Q2.
More gigafactories: Tesla is building a gigafactory in Monterrey, Mexico. We have limited detail so far. Berlin and Texas are growing rapidly with the production of Model Y.
AI innovations: Autopilot remains at the core of Tesla's strategy, accompanied by cutting-edge AI developments such as Dojo (supercomputer) and Optimus (humanoid robots). These are long shots, but if they work out, the upside is significant. They are like call options with a limited downside but an uncapped upside. However, Tesla’s current valuation reflects optimism around future value unlocked from these initiatives.
Cybertruck: While demand is “off the hook,” we must see how the production ramp will play out. Elon Musk expects Tesla to make them in “high volume next year,” without specifics.
Tesla Semi: The Class 8 Semi-truck, first mentioned in the Tesla 2016 Master Plan, won’t start production until late 2024.
Next-generation platform: The next-generation vehicle is expected to be a new mainstream platform that could surpass Model 3/Y production volumes. It’s expected to be considerably cheaper than the Model 3.
Many observers were anticipating the announcement of a new, more affordable model (sub-$35,000). Maybe with a few more price cuts, the Model 3 will be that model. 😅
We’ll have to keep our eyes peeled for more news on what comes next (and when).
Elon takes from Peter Lynch for investing advice.
I’ll leave you with this quote from Elon toward the end of the earnings call:
“I really see a path to a 10x -- call it a 5x increase in the value of the company, maybe a 10x. And -- but where things go along the way, the trials and tribulations and the mood of the markets, one cannot predict. And so, the old adage of buy and hold is right. For an investment advice, I’d say like identifying a company as products you love. See if they -- does it seem like they’ll continue to make good products or great products? Buy that stock and hold it. That’s it. You’ll win.”
You might recognize the “buy what you know” adage from Peter Lynch we recently discussed. For more on this, check the article below.
Margin will continue to ebb and flow in the near term. But the rise of non-auto gross margins combined with other automakers adopting Tesla standards and the ambitious plan around Dojo compute gives Tesla shareholders plenty to look forward to. But you have to be mindful of valuation over time and “buy low” as Elon puts it.
Next week, earnings season is in full swing with Big Tech reporting.
What company should we cover first in our report next Friday?
That’s it for today!
Stay healthy and invest on!
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Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long TSLA in the App Economy Portfolio. I bought TSLA shares in early May. However, I would not add to my position at this time. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members here.