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Tesla Q3 Earnings: Deliveries Up, Income Down

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On the 18th of October, Tesla Inc released the 3rd quarter earnings for its Financial Year (FY) 2023. The trends and metrics in the results show the company is going through a rather complicated phase.

Shifting Delivery Trends

At current rates, the Model S/X is a higher-priced (and estimably higher-margin) products than the more diminutively-margined Model 3/Y.

The company’s total production and delivery trends, across 9 months of the current FY, are well near par that of total numbers of the previous FY. Trends in the product mix, however, show the company’s brand appeal shifting in the addressable customer segments.

While the “pricier” models are being produced more-or-less at par, sales have been dipping. In contrast, the cheaper Model 3/Y’s are selling like hot cakes, with current production and delivery trends likely to close out the year at volumes higher than the past FY.

The company has also announced that price cuts will continue into the next year. While the company has a pretty strong free cash flow for some time now, the battle to keep the delivery numbers aloft comes at a cost.

Turning Financial Trends

Among the trends in financial line items, one insight stands out: the company’s automotive business has consistently driven around 95% of revenues since 2020.

FY 2021 was a stalwart year where the company’s net income grew 555% over the past year while total revenue had grown by only 71%. In the past nine months of the current FY, net income is a little over half of what the company had over the past FY despite total revenue comfortably running above par relative to past year.

The reasons for these are in the cost elements: the cost of revenue for the current FY is already at par with the past year while operating expenses aren’t far behind either. This could be attributable to two factors: firstly, the battle to continue pushing up delivery volumes via aggressive discounting while input costs are rising is straining the bottom line. The company’s own quarterly earnings deck highlights this strain in graphical terms: while total vehicle deliveries are consistently rising, free cash flow has been in decline over the past four quarters, which is essentially a reversal of long-term trends.

Over the past four quarters, net income has also been declining while the trend of consistently rising EBITDA is also broken. The company also indicates that its Year-on-Year (YoY) revenue growth is diving relative to that of the auto industry, which has been rising for six straight quarters now.

The second factor could be that the company is gearing up to finally enter into the market a new model using the current-generation platforms: the Cybertruck.

A production line that would produce roughly about 500 Cybertrucks a day likely isn’t cheap and, considering the trends, a rather bold proposition.

In Conclusion

As per news reports from September, the pricing of the Cybertruck is proximate to that of the Model 3. This is quite likely a welcome development for the company’s sales teams: present delivery breakdowns seem to indicate that the consumer segments with a preference for the price point still find value in the company’s branding. This is likely not the case with its “pricier” models: as highlighted in past articles, Tesla has seen an erosion of market share in “premium EV” segment due to the measured yet aggressive entry of high-end legacy carmakers into the segment.

Tesla isn’t unique in that it’s a challenge to have a “basic” and “premium” model under the same marque: nearly every major carmaker tends to build out (or at least try to) a separate marque for the “premium” buyer segment. It isn’t presently clear if the company will do so. If it does, this means a deepening commitment to being in the “premium” space. A separate marque could bring out collaboration opportunities with other carmakers, upstart or not.

Overall, Tesla misses the analysts’ benchmarks for success since the positive trends in overall delivery growth didn’t translate into a commensurate growth in net income. Continuing with the “discounting” strategy would likely lead to further declines in free cash flows and, with it, the flexibility to plough cash into fueling growth of production capacities and new models for the market. It won’t be surprising if the company issues a significant amount of new “paper” (i.e. corporate bonds) over the next quarter or so.

The Federal Reserve’s latest “Beige Book”, released on the 18th of October, reveals that consumer spending is mostly mixed for a variety of factors. Foreign central banks are beginning to highlight significant risks with U.S. tech stocks, amongst which the likes of Tesla is included. The Bank of England’s Financial Policy Committee (FPC) meetings on September 26 and October 5 noted noted that assets such as U.S. dollar-denominated corporate bonds and U.S. technology equities are specifically vulnerable to inflation uncertainties and interest rate volatilities.

While Tesla does fine as a company which has a favourable position in a growing market, an unassailable (and historical) fact is that it won’t have a commanding position in said market forever; EVs are no longer a curiosity in the automotive space. Given the uncertainty of market conditions, the traditionally high overvaluations of the stock will likely be tested in both the short and long runs, depending on the company’s market share changes over the next 12 months.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

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Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

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