Tesla ($TSLA) – Deliveries & Earnings Setup – July 06, 2024
Tesla delivered 444,000 cars during Q1 compared to 438,000 estimates, representing a 1.4% beat. This is certainly good news for bulls. The auto industry is hyper-cyclical and rate sensitive and there was a risk that analysts had not yet baked enough weakness into their forecasts. This points to demand stability. It’s a piece of data that depicts Tesla enduring these tough times reasonably well. That, paired with some likely short covering, is why the stock responded so positively to this news.
As we head into its earnings report this month, what is left to focus on? Pricing & margins. First is the actual price tag tied to these vehicles. Tesla has slashed prices of some models to help with affordability amid the higher cost of capital environment. It has been able to offset this by pulling some input costs out of its car manufacturing processes, but overall auto gross margin did continue to erode last quarter. Tesla has frequently stated in recent quarters that it’s willing to offer lower upfront prices and rely on more software subscription upsells down the road to “harvest more margin.”
This approach makes it even more difficult for legacy automakers to build their own EV programs to compete. Remember that Tesla’s EV margins are already best-in-class by a large amount. The debut of a $25,000 mass-market model, which borrows from existing production capacity to cut program costs, will make competing even tougher for incumbents too. Potential market share gains from this debut should happen while the maturation of its Cybertruck manufacturing, 4680 cell battery production, and Model 3 production in Austin all take place. Maturation means more efficient capacity utilization and more margin.
This is the glass half-full view, with bears instead saying these cuts are in response to eroding competitive differentiation, as well as EV fatigue and recent strength in plug-in hybrids. Some simply believe that others are catching up to Tesla’s technological lead – especially in China where Tesla does a ton of business. Continued Y/Y delivery declines and Tesla beating an already sharply lowered delivery estimate are their two centerpieces of evidence. Skeptics also continue to point out how cyclical this industry is, and how the fun part of the cycle (easier monetary policy) has yet to begin.
The quarter should be a fascinating one as always. Expectations are higher vs. last report, as the company’s stock finds itself on stronger footing heading into this month’s event. “Better than feared” won’t cut it like it did three months ago. The firm will need to show real signs of turning a corner and getting back to the fundamental EV king that it has been in recent years. We shall see how they do. My popcorn is ready. It’s hard to bet against Elon… like him or not.
