Tesla (TSLA) – Some Thoughts – April 20, 2024
I don’t own Tesla shares. I would never even contemplate shorting Tesla shares. Tesla has been a hot topic in the news lately, and I wanted to offer my understanding of the current debate, without picking sides.
The margin trajectory from here is the most polarizing topic. First, there are some tailwinds it enjoys. Tesla continues to cut input costs per vehicle (by $3,000 Y/Y as of last quarter) & sees that trend continuing. Ramping up its new 4680 cell battery production will help a lot with scrap bills to cut costs too. Ramping capacity at newer gigafactories could be another boost depending on current demand levels. Its solar & especially its energy storage businesses also continue to find mainly consistent operating leverage.
But there are material margin headwinds to contemplate as well. Overall demand levels are currently challenged, which means less fixed cost leverage. Mix shift to lower-priced vehicles is a margin headwind today as well. Cybertruck costs are another issue as the production line hasn’t yet ramped (but costs have). That margin drag could also be more structural than some assumed, as early sales data from that model has not been stellar. Finally, Tesla continues to invest aggressively in AI and R&D to support its next-gen vehicle line-up. This, paired with weaker than normal sector demand, is hurting margins too.
The most controversial margin headwind, however, is the targeted price cuts across some models in some geographies. Tesla’s unmatched margin profile (both gross & net vs. all other EV programs) gives it the flexibility to profitably lean into consumer affordability. After all, higher rates mean higher interest payments and more expensive cars (all else equal). Optimists here will tell you Tesla is controlling its average selling price to counteract this reality for its consumers. They say that Tesla is willing to accept lower up-front margins today as it knows there are software up-sells coming in the future (like hopefully Full Self Driving (FSD)) to “harvest more profits” over time. Leadership has said the same thing. With tougher macro today, maintaining low sale prices makes finding demand amid the not-so-fun part of this auto cycle tougher for others. Tesla is using its competitive positioning to amplify this pain for its competition. That should mean stronger Tesla market share over time as headwinds abate & growth likely re-accelerates. That’s the bull case here.
Bears will say that Tesla is cutting costs and seeing margins tank due to intensifying competition across the sector (& poor macro). Especially in Europe and China, without the same tax benefits, skeptics simply think others are catching up, Tesla’s differentiation is shrinking and its pricing power is too. As of last quarter, market share trends were rising slightly in UCAN, flat in Europe and falling ever so slightly in China (where competition today is the most fierce). Most recently, ACEA reported the largest Y/Y decline in EU March sales in over a year.
And bears also have some new ammo with rumors of the postponed $25,000 mass market model plans. A shift in focus to robotaxi is far more speculative and will take far more time for potential revenues to ramp. If that’s happening, investors believing in Tesla for its dominant EV share and margin profile may become a tad less bullish. Finally, some will say that Elon’s antics and polarizing dialogue are turning some buyers off. These antics aren’t anything new and I truly don’t think that’s a relevant factor here.
What do I think matters? It’s not Tesla suddenly finding a sharp recovery, more volume growth and a margin trough. That’s not realistic right now. What matters is where its current financial struggles are currently coming from. If this is macro-related, dip buyers right now could easily be handsomely rewarded over the coming years. If it’s more micro, and competition-based, they might be solely reliant on a distant future robotaxi to find capital gains. Which side is right? I will leave that for you to decide as this firm remains at the very top of my too hard pile.
