Tesla Earnings Preview: Outlook Not Optimistic, No Signs of Stabilization Yet

Chart: Tesla’s Stock Performance

Tesla's business structure is divided into three main sectors: automotive, energy, and services and other. The automotive sector includes revenue from electric vehicle sales, leasing, and regulatory credit sales; services and other include non-warranty after-sales services, paid charging services, and used car sales.

Looking at the revenue share of Q4 2023, sales of electric vehicles and related automotive services accounted for over 93%. While Tesla's other business ventures like FSD, DOJO, and robotics are very imaginative in the medium to long term and contribute significantly to Tesla's valuation, electric vehicle sales remain the core foundation.

Chart: Tesla’s Main Business Revenue Structure (%)

Revenue side: Considering that Tesla's vehicle sales in Q1 2024 dropped by about 100,000 units compared to the previous quarter, a 20% decrease quarter over quarter, and per-unit revenue is expected to drop by a single-digit percentage, Q1 revenue for Tesla in 2024 looks bleak, with a small chance of exceeding expectations. Although production was indeed temporarily constrained by supply limits, the main factor causing the discrepancy is still demand issues.

Profit side: This quarter faces several negative factors affecting gross margin, and we expect Tesla's gross margin to continue to be under pressure, with no clear positive factors and potentially lower than expected.

Product roadmap: The cheaper Model 2 may not be discontinued, but a delay in its release is possible. Production of the next-generation vehicle in Mexico is expected to start as early as 2026. Tesla's existing vehicle product line is nearing the natural limit of cost reduction, meaning opportunities for sales growth may not emerge until 2025-2026.

Business outlook: Musk is likely to emphasize the narrative of the autonomous driving business during the earnings call, reiterating that autonomous driving is more important than producing new cars. Anyone investing in Tesla is surely looking forward to advancements in autonomous driving. However, from an investment risk perspective, the market currently needs certainty from Musk. Emphasizing autonomous driving undoubtedly increases investment risk, which is not favorable for the short-term stock price. However, if Musk emphasizes measures to salvage sales, it could potentially boost investor confidence.

Expected stock price: Considering the negative impact of company performance on the stock price, we expect the stock price to decline after the Q1 earnings report is released.

The Q1 sales disclosed are clear-cut, significantly below market expectations. According to Tesla's reported vehicle sales data, Q1 deliveries were only 386,800 units, an 8.53% decrease year over year and a 20.17% decrease quarter over quarter, substantially below the market consensus of 430,000 units.

Tesla attributed part of the drop in sales to the early stages of production at the refurbished Fremont Model 3 factory, as well as partial factory shutdowns caused by the conflict in the Red Sea and arson attacks at the Berlin Gigafactory.

Chart: Tesla Quarterly Sales (Units)

Although production was indeed temporarily constrained by supply limits, we believe the main factor causing the discrepancy is still demand issues, especially weak demand in the United States. Historically, Tesla's average deliveries accounted for 97% of production. Based on Q1 production levels, theoretically, there should have been 420,000 deliveries,whereas the actual reported deliveries were 387,000 units. If we attribute about half of the shortfall to the production constraints of Model 3 and logistics issues caused by the disruption in the Red Sea, excluding this factor, the deliveries should have been 404,000 units, which suggests that the remaining shortfall was due to weak demand. In Q1 2024, Tesla produced approximately 433,400 vehicles, and the difference between vehicle deliveries and production indicates that Tesla's car inventory increased by about 46,000 in Q1 2024, which is also confirmed by the rise in stock levels.

The EV charging infrastructure in the U.S. market is inadequate, leading consumers to increasingly favor hybrid vehicles over Tesla's pure electric cars, resulting in weak demand for Tesla vehicles in the U.S. market. In Q1 2024, the market share of EVs in total U.S. car sales dropped to 7.3%, below the 8.1% in Q4 2023 and the 7.6% for the full year of 2023.

In contrast, demand in China was slightly better than expected. According to registration data, Tesla's vehicle deliveries in the Chinese market were 134,000 units, slightly higher than Bloomberg's previous forecast of 128,000 units. However, the competitive landscape has deteriorated rapidly. By the end of 2023, the penetration rate of new energy vehicles in China had reached over 33%, with the growth rate of pure electric penetration significantly slowing down. The 200,000 to 400,000 RMB price range, where Tesla competes, is the most fiercely competitive segment. In 2024, new market entrants like Xiaomi's SU7, Huawei's AITO, and Li Auto are planning to launch several new models. Concerns about Tesla's brand fatigue and the lack of new models have raised fears that the company's demand could be impacted by the aggressive competition from rivals.

The situation in Europe is also not optimistic. After the phase-out of subsidy policies, overall EV sales in Europe fell by 11% in March. In major EV-consuming countries like Germany, Sweden, and Italy, the decline in EV sales reached up to 30%.

From a per-unit revenue perspective, Tesla began the year with a new round of price reductions in Europe and China. Although Tesla adopted a price increase strategy in several countries and regions in mid to late March, the significant discounts offered from the beginning of the year until the end of February have not been entirely offset by the price increases. Tesla's Average Selling Price (ASP) for the first quarter showed a downward trend compared to Q4 2023. According to relevant data:

The average price of Tesla vehicles in the first quarter fell by approximately 2.4%, driven primarily by a 5% price cut for the Model 3 in the U.S., a 4% price cut for the Model Y in Europe, and an 8% price cut for the Model 3 in China.

Given the lower-than-expected sales volume for the first quarter, we anticipate that Tesla is likely to continue reducing prices in the remaining three quarters of the year, with the ASP expected to continue to decline year over year. The recent across-the-board price reductions by Tesla indicate that the price war is expected to continue into the second quarter, with post-reduction prices lower than before the April price increase, which can also be confirmed.

Chart: Tesla Vehicle Per-Unit Revenue (Thousands of U.S. Dollars)

Compared to Bloomberg consensus estimates, Tesla's total projected revenue for the first quarter is expected to reach $23.374 billion, maintaining stability year over year and decreasing by 7% quarter over quarter. Of this, automotive sales revenue is expected to be $18.565 billion, a 1.67% decrease year over year and a 10% decrease quarter over quarter.

Considering that Tesla's vehicle sales in the first quarter of 2024 dropped by about 100,000 units compared to the previous quarter, a 20% decrease quarter over quarter, and per-unit revenue is expected to drop by a single-digit percentage, we believe that Tesla's Q1 revenue in 2024 is not optimistic, with a small chance of exceeding expectations.

According to Bloomberg consensus expectations, Tesla's overall gross margin for Q1 2024 is also expected to decrease from 17.6% in Q4 2023 to 16.9%, with automotive gross margin (excluding regulatory credit sales) dropping from 16.6% in Q4 2023 to 15.9%. The company’s EPS is also expected to decline from $0.71 in the previous quarter to $0.58 this quarter, a drop of 18%.

We expect Tesla's gross margin to continue to be under pressure with no clear positive factors currently in sight. Looking comprehensively, the positive and negative factors affecting Tesla's gross margin for Q1 are as follows:

（1）Vehicle sales far below expectations — Negative, significant impact

The automotive industry has relatively high fixed costs, such as R&D, factory depreciation, and employee wages. When sales volume declines, the fixed costs allocated per unit product will increase, thereby reducing the marginal contribution of each car, leading to a decrease in gross margin.

（2）In terms of upstream raw material costs, prices of lithium carbonate saw a quarterly rebound after the Spring Festival — Negative, slight impact

（3）Production costs at Tesla’s Berlin and Austin factories decrease as output increases — Positive, slight impact

（4）Labor costs rise, with Tesla announcing a wage increase for U.S. factory workers in January — Negative, slight impact

Under pressure from competitors, Tesla also announced a wage increase for all its U.S. production workers, with an approximate 10% raise in worker wages (future adjustments may occur, and the final extent of the wage increase is currently uncertain). Tesla has about 130,000 employees globally, with about half of them in the U.S. The rise in labor costs will have a negative impact on Tesla's gross margin for 2024.

（5）Cybertruck production — Negative, slight impact Deliveries of the Cybertruck in 2024 will further negatively impact the gross margin, as the cash flow for the Cybertruck will be negative for the next 18 months.

Chart: Automotive Business Gross Margin (Excluding Credit Sales)

Tesla recently announced that every Tesla in the U.S. would receive a one-month free trial of FSD and required its employees to install and demonstrate the FSD Beta version for each customer taking delivery in North America. Tesla lowered the price of FSD from the original $199 per month to $99 per month and reduced its outright purchase price from $12,000 to $8,000, a drop of about 33%.

After the first quarter, an increase in the adoption rate of FSD is expected. However, due to the decrease in the selling price, the positive impact of FSD revenue on gross margin is limited.

On April 5th, the media reported that Tesla had abandoned the development plan for the budget Model 2, shifting focus to the development of Robotaxi. Musk quickly denied this as false. Currently, Model 2 may not be discontinued, but a delay is possible.

Reuters reported before Tesla's Q4 2023 earnings report that the company had informed suppliers of plans to begin production of the next-generation vehicle in June 2025. Additionally, the Texas Gigafactory will be the first manufacturing plant for the company's next-generation vehicles, with Mexico as the second plant. Management has indicated that they first want to demonstrate the success of the next-generation vehicle at the Austin Gigafactory before beginning construction of the Mexico Gigafactory, inferring that production of the next-generation vehicle in Mexico would start no earlier than 2026.Its current vehicle product line is nearing the natural limit of cost reduction, meaning opportunities for sales growth may not appear until 2025-2026.

Although it has already significantly declined, from a valuation perspective, due to the slowdown in growth, as of April 23, 2024, Tesla's forward P/E valuation still stands at a high 52x. Tesla's valuation has long been significantly higher compared to its peers, largely due to its past hypergrowth and more optimistic strategic goals set by the company, as well as imaginative ventures such as humanoid robots. However, after the significant shortfall in Q1 sales, investor sentiment has noticeably shifted, focusing more on automotive business and actual performance. Therefore, we believe that even with a substantial drop, Tesla's valuation is still not undervalued.

In conclusion, we believe there is a significant likelihood that Tesla's revenue performance will still fall below market expectations, and gross margins will continue to be under pressure. Musk is very likely to emphasize the autonomous driving business story at the earnings call, reiterating once more that autonomous driving is more important than producing new cars.

While long-term technological development is indeed more crucial, and anyone investing in Tesla surely has some expectations for autonomous driving, the market currently needs certainty from Musk. Tesla is also trying to rescue its performance through a pricing strategy, but the effect is not significant, and overall demand continues to decline. Emphasizing autonomous driving will undoubtedly increase investment risks, which is not favorable for the short-term stock price. However, if Musk emphasizes more measures to salvage sales, it could potentially boost investor confidence.

Currently, Tesla's implied volatility is ±9.6%, indicating that the options market is betting on a post-earnings single-day price movement of 9.6%; the market sentiment is bearish with a strong pessimistic expectation.Considering the poor performance of the company in Q1 2024, investors could consider buying put options for the company. If the stock price drops as expected, the value of the put options will rise, allowing investors to profit by selling the options or exercising them.