Tesla Earnings Preview: What to Watch?

Tesla will release its results for the first quarter of 2023 after the close on April 19.

As a much-anticipated electric vehicle giant, what key points should be paid attention to in the first quarter financial report? Where is Tesla's investment value?

First of all, from the perspective of Tesla's revenue composition, the automotive business is still the core focus. As of the end of 2022, the automotive business accounted for 95.2% of the revenue, which is Tesla's main source of revenue and the focus of our analysis. Most of it is hardware car sales revenue, and a small part is FSD software subscription revenue.

The current income of energy storage and power generation business is relatively small, about 4.8%, but the potential for long-term development is huge. When judging Tesla's long-term investment value, the energy storage and power generation business should be taken into consideration.

Tesla has disclosed 23Q1 car deliveries of 422,900 vehicles, YoY+36%, basically in line with the company's expectations (421,500 vehicles) and Bloomberg's consensus forecast (421,200 vehicles). However, Musk mentioned in the last earnings call that the delivery target for 2023 is expected to increase by 50% year-on-year, so if the target is not met in the first quarter, the delivery of cars will need to be accelerated in the remaining three quarters of this year.

The increase in car deliveries in the first quarter was mainly due to the effective price reduction strategy that stimulated consumer demand. In the first quarter of this year, many of Tesla's products have significantly reduced prices. In January, Tesla cut the price of the base Model Y by 20% and the price of the high-performance Model 3 by 14%. After the investor day in March, Tesla's high-end models also began to slash prices, with the starting price of the Model X falling from $109,990 to $99,990, a drop of about 9%.

The profit loss caused by the price reduction of automobiles needs to be hedged through the scale effect. The profit loss caused by the price reduction of automobiles needs to be hedged by higher sales growth and further cost reduction.

1) In terms of sales volume, the sales growth rate in the first quarter was basically in line with expectations. If the current growth rate continues to be maintained in subsequent quarters, it will help support the company's performance. It is worth noting that the current consumer demand in the auto industry is relatively weak, mainly due to the impact of the current high interest rate environment in the United States, tightening lending standards, and the possible economic recession in the future. Tesla is expected to consider further price cuts to stimulate consumer demand after further increases in car production and supply at the Berlin and Austin plants.

2) In terms of cost, it is expected that Tesla's car production cost will have further room for decline. On the one hand, the price drop of upstream raw material lithium, although it will not be immediately reflected in the performance of 23Q1, is expected to be directly reflected in the cost of goods sold in the future; The rapid decline in manufacturing costs and the cost of raw materials will lead to a continuous decline in the cost of the electric vehicle industry. Tesla's first price cuts to seize the market will also help Tesla's brand awareness in the market.

Tesla's price reduction strategy reduces dimensionality and strikes at other new car-making forces, which is conducive to consolidating its market position. Compared with other car companies, Tesla can bear the risk of price cuts better. Although price reduction is a challenge for Tesla's profit margin, 23Q1 may be the lowest point of annual profit. But price cuts are likely to be central to Tesla unlocking additional sales, especially if Tesla further expands production capacity. Tesla's strategy is to use its cost advantage to fund production growth. Car manufacturing is an industry with economies of scale, the greater the sales volume, the lower the cost of a single car. For other car companies, the negative impact of Tesla's price cuts is greater, because they are at a significant margin/cost disadvantage compared with Tesla.

Therefore, under the premise that Tesla's cost advantage is significantly ahead, the price reduction strategy will force other new car manufacturers to withdraw from the market, while traditional car companies will be relatively less impacted but also face greater profit pressure. Tesla is expected to earn a larger market share from this, paving the way for future growth.

In the long run, the continuous expansion of the hardware base will provide long-term support for the growth of software subscription services. Analogous to the development of smartphones, as mobile phone shipments grow to a certain scale, software services will become a new growth point for performance. Tesla's FSD software subscription service also has similar characteristics. With the maturity of autonomous driving technology, the further reduction of costs and the further improvement of policy support, the penetration rate of Tesla FSD software subscription is expected to further increase. Compared with car sales, it has a higher frequency of repurchase rate and a longer life cycle and higher profit margins.

Energy storage and power generation is an important part of Tesla's grand plan, and future growth is expected. During the Tesla Investor Day event in March, Musk mentioned that in order to achieve the long-term goal of 100% sustainable energy, it is necessary to achieve a construction scale of 240TWh of energy storage and 30TW of renewable energy generation. The downstream application market of energy storage is very extensive. Similar to a large power bank, it can play the role of power distribution, peak shaving and valley filling. In areas where power distribution is not so smooth, the application of energy storage will be quite broad.

At present, Tesla’s market value is 586.323 billion U.S. dollars, and the overall sales growth is guided at about 50%. A company that maintains such high-speed growth also proposes: energy storage, power generation and other businesses have a lot of room for imagination, and the overall valuation level will be higher than the mature enterprises of the same type.

According to Bloomberg consensus forecast, 23Q1 revenue is expected to be US$23.529 billion, adjusted diluted EPS is US$0.87, and gross profit margin is 21.25%. It is estimated that the full-year revenue in 2023 will be US$102.315 billion, the adjusted diluted EPS will be US$3.96, and the gross profit margin will be 21.93%. The current PE is about 40. Although Tesla itself has a large imagination space, Tesla’s Whether the stock price can rise will greatly depend on whether the financial report can exceed expectations every time and the monthly sales situation.