Tesla Q1 2024 Earnings Review – April 23, 2024

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Tesla Q1 2024 Earnings Review – April 23, 2024

Tesla needs no introduction.

Demand

Tesla missed revenue estimates by 4.3%. Its 27.0% 3-yr revenue compounded annual growth rate (CAGR) compares to 33.0% as of last quarter & 38.7% 2 quarters ago.

  • Notable revenue headwinds — price cuts; vehicle mix-shift to lower-priced models; production disruptions described later; macro; seasonality.
  • Notable revenue tailwinds — Non-auto business; auto-park feature leading to better full self driving (FSD) monetization.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Profitability & Margins

Tesla missed GAAP EBIT estimates by 24.0% and $0.42 GAAP EPS estimates by $0.08. Its gross profit margin (GPM) was better than expected thanks to non-auto, while its auto gross margin ex-credits was worse than 15.2% expectations. It burned through more than $2 billion in free cash flow (FCF) vs. expectations of generating a little over $1 billion in FCF for the quarter. More on this later. Notably, Tesla recently laid off 10% of its employees, which should save $1 billion annually in operating expenses (OpEx).

  • Notable profit headwinds — all demand headwinds already discussed; Cybertruck.
  • Notable profit tailwinds — lower scrap bill from the 4680 battery plant as that scales; raw materials; freight.

There are a few different ways that I’ve seen people calculate auto GPM ex-credits. This, in my mind, is by far the most intuitive way to do it and is the formula that I use:

Auto GPM ex-credits = (auto revenue – credits – auto input costs) / ( auto revenue – credits)

GPM = Gross Profit Margin

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Balance Sheet

  • $26.9B in cash & equivalents.
  • $5.4B in debt.
  • Diluted shares rose 0.5% Y/Y. Not bad… but the large comp package for Musk that will soon be voted on would lead to some significant diluted share growth.

Guidance & Valuation

Tesla reiterated its vague guidance of slowing volume growth in 2024 and having all of the cash that it needs on hand. Interestingly, Musk told us on the call that auto revenue growth would be better than 0% in 2024. I get that it’s hard to celebrate positive revenue growth for a company that had been compounding at 50%, but this is still important. Sell-side revenue estimates for 2024 have continued to plummet and now sit at 7.2% Y/Y. Combining positive auto growth with energy storage growth (expected to be faster than auto) could put a near term floor in for revenue estimates this year. That matters… a lot.

Tesla trades for 48x 2024 EBIT and 103x 2024 FCF. EBIT is expected to grow by 2% Y/Y with FCF expected to be flat Y/Y. The profit results this quarter will lead to downward estimate revisions (outside of revenue).

Call & Release

Unique Challenges, Input Costs & Pricing

Aside from a historically aggressive rate hike cycle and auto being a rate sensitive business, there were more headwinds to discuss for this quarter. Red Sea conflicts complicated production capacity across the pond and fires at its Berlin factory added to those complications.

There have been a lot of headlines about Tesla pricing this past quarter. Per the team, its ability to remove input costs per vehicle is keeping unit economics in good shape for its more mature models. These input cost gains have essentially offset the price cuts in a one-for-one manner.

BUT… Overall auto gross margin is falling due to newer projects. Again, it’s still ramping the Cybertruck capacity, 4680 cell battery production and Model 3 production in Austin too. Before these projects reach maturity, there is an inherent deadweight loss that hurts overall profitability. Notably, Austin is getting close to the mature Fremont factory’s input cost per vehicle as this specific margin headwind fades. Without these headwinds and the unplanned production disruptions, auto gross margin expanded slightly (but that’s a lot of adjusting).

The Debate:

As I do each quarter for this polarizing company, I’d like to frame the current bear-bull debate as I see it, while leaving it to you to pick a side.

Bears Say:

Bears will say that competitive pressures are the source of the weakness here. They see model and FSD subscription price cuts as evidence. They’re skeptical about plug-in hybrid strength being temporary and macro weakness being the main headwind. To be fair, GM did report solidly positive revenue growth and expanding operating margins this quarter. Tesla did not. Not the same demand market, but closely related.

Bears lost some ammo this quarter with Tesla confirming plans to accelerate its $25,000 model debut from late 2025 to earlier in the year. This follows what we can now call erroneous media reports about these model plans being postponed. That makes the bull case less reliant on more speculative projects like FSD and its Optimus robot. That should be good for sentiment, but bears see this new model as more of an update vs. anything new.

Bulls Say:

Bulls say that when the cycle turns, so will Tesla’s results. They see fires in the Berlin factory and Red Sea conflict as temporary, non-recurring challenges that are amplifying production weakness. They will argue that price cuts today just make Tesla more difficult to compete with for other EV programs. Most of those other programs still have negative GPMs. And as Tesla tells investors, it can “harvest more margin over time with software upsells.”

In their view, the next-generation vehicle wave will support years of growth to come. They don’t think competition (aside from maybe Waymo and Rivian) has come remotely close to catching up. Bulls say that profit weakness today is partially self-inflicted as Tesla invests heavily in AI and autonomous software… somewhat similarly to Meta a few years ago. The costs are hefty today. The revenues tied to those costs will take time to ramp. And in the meantime? Margin pressure. Bulls see explosive revenue from these costs eventually flowing in and driving operating leverage.

Seeking More Demand, Inventory Gluts & Free Cash Flow:

Tesla told investors that it has been trying to “increase awareness” and is “expanding vehicle financing programs for its customers.” To me, that means more marketing spend and more discounting.

Notably, the -$2.5 billion surprise FCF burn was due to an inventory/delivery “mismatch.” It sees FCF returning to positive territory starting next quarter. Heavy CapEx to support more AI infrastructure needs and its Optimus robot are also leading to heavy CapEx and FCF pressure. For context, its model training capacity doubled Q/Q; it plans to double its Nvidia H100 chips in 2024 to keep exponentially expanding training/inference capacity.

Next-Gen Vehicle Line Up:

As briefly mentioned, Tesla is accelerating the release of its new vehicles from the back half of 2025 to the front half. This, as learned in the Q&A, includes its $25,000 rumored mass market model. The team was asked if these cars would be entirely new, or just tweaks to current models. They didn’t answer, but the fact that existing production lines will be used likely points to the latter being true. This release is not what Tesla considers the key products in its “next wave of growth.” The cars will borrow pieces from its new platform, but will lean heavily on the current software and manufacturing processes too. This means Tesla doesn’t have to build new production capacity or incur the massive costs usually associated with jump-starting a new vehicle program. This is rational.

AI and FSD:

Tesla, as it has been for years, is hard at work on FSD and its robotaxi vision. That’s where the elevated CapEx from AI infrastructure is mostly coming from. It thinks it has the best inference capabilities in the world, by far. I’m sure many companies would argue with that opinion. Its newer FSD Version 12 uses end-to-end neural networks and a vision-only approach to emulate how a human thinks and drives. It ripped out countless lines of C++ code to embrace this new approach, and all signs point to that being the right move; early success is reaffirming Elon’s conviction in solving for fully autonomous cars.

It also surprisingly sees seamless regulatory approval… if it can demonstrate that FSD is safer than people. They’re probably right, but demonstrating that in a clear, objective way might be somewhat of a challenge. Separately, it sees Waymo’s progress as very positive for its ability to secure needed approvals. Google is paving the way.

Tesla is also in late-stage discussions with a “major legacy automaker” to license FSD. Elon thinks a deal could be closed this year. To me, that means the supply of autonomous vehicles will be somewhat fragmented rather than owned by a single player such as Tesla. That was already likely with Waymo and many other formidable competitors, but this makes it more likely. As a brief aside, this means aggregation of potential revenue will not happen in ride-hailing on the supply side. Uber accomplished this with its dominant driver market share; I don’t see any autonomous players doing so. So? These companies, to offer customers maximum occupancy and maximum car value, will likely need to plug into an aggregated consumer demand network without monopoly-like supply or market power.

That network is Uber, and, to a lesser extent, Lyft in the USA. I see Tesla, Google and all other autonomous vehicle programs integrating with the ride-sharing giants as a result. Waymo already does. I envision Tesla drivers using their cars for ride-sharing and seamlessly plugging into the Uber’s demand from within the Tesla app. Tesla and others will bring the cars (from self-owned fleets and consumers)… Uber will guarantee best-possible occupancy rates. It’s a win-win.

Energy Storage, Generation & Services:

Non-auto businesses continue to perform well and set a new Q1 gross margin record of 24.6%. Non-auto is leading Tesla’s demand and profit growth while the team expects record non-auto profitability to consistently continue in the years ahead. Revenue for storage rose by 7% Y/Y, but gross profit rose by 140% Y/Y as it ramped mega-pack deployments; solar installations are still an interest rate-based headwind.

  • Used car sales were a gross profit headwind.
  • Part sales were a gross profit tailwind.

From the Presentation

Optimus:

The Optimus robot can now perform simple tasks in a lab environment. Tesla plans to use these in its factories this year and hopes to begin selling them next year.

Take

The headline numbers are ugly. I think the positive auto growth in 2024 commentary was sorely needed. I also think this was better than absurdly low expectations heading in. Still, this wasn’t good and I don’t think that should surprise anyone. Most of its revenue comes from cars; car sales are rate-sensitive. As I’ve said over the last few weeks, this comes down to bulls growing confident in issues being purely macro-based… or bears growing confident in this weakness being specific to Tesla. I don’t think this quarter did anything to embolden either side. This remains at the very top of my too hard pile. I love covering the company, as it’s truly fascinating and entertaining. I don’t envision myself owning shares; I would never short it.

Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.

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