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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
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Tesla earnings review: Between two mountain tops?
Peter Garnry
Chief Investment Strategist
Summary: Tesla is in a transition year, with growth slowing down and gross margins under pressure. The company is facing a number of risks, including rising interest rates, slowing EV demand, Elon Musk's fight for more control, wage pressures, and increasing competition. Tesla shareholders should prepare for more volatility and potential disappointments in 2024.
2024 is transition year for Tesla
In our earnings preview this Monday we highlighted that Tesla had come to a point where the growth narrative is key for maintain a positive sentiment on its shares. The reason is that the gross margin is under pressure. Equities are quite simple sometimes. If the margin is under pressure the revenue growth figures matter more for investors. So how did Tesla do in Q4? Here are the key highlights:
- Gross margin at 17.6% vs est. 18.1% on lower average selling prices as competition has increased from especially Chinese EV-makers.
- Revenue of $25.2bn vs est. $25.9bn translating into growth of just 3.5% y/y the lowest growth rate since Q2 2020 which was the maximum pain quarter for the world during the early days of the pandemic.
- Tesla says that “2024 volume growth may be notably lower than 2023” supporting our argument in our earnings preview that Musk’s previously stated growth target of 50% annualized volume growth over an entire decade is too optimistic.
- Musk said on the analyst call that Tesla is between “two growth waves” meaning that growth rates have come down a lot and that 2024 is a transition year before the next growth wave.
- The company said that it ramping up Cybertruck production and that it has capacity to produce up to 125,000 annually, but that production ramp-up will take time as the design is more complicated than other models.
- In addition, Tesla mentioned that it is working on its next-generation low-cost models which are scheduled for production in mid-2025. The rumours are that one of the new models will be a compact crossover.
- Finally, Elon Musk did everything he could to paint an optimistic future around self-driving cars and robotics saying that there is a “good chance” that Tesla can ship the first models of its Optimus robot next year. He also said that the expensive Dojo supercomputer project is a long shot by it is working.
Overall, Tesla ended 2023 with 19% revenue growth but adjusted net income declining by 29% as pricing pressures hit margin. Last year will still go down in history as the year that transformed the EV industry and Tesla is likely going to be among the winning group of EV-makers in the future. But one thing is the company’s performance, another thing is the stock price. Expectations have been so high and there is clearly a “Musk premium” baked into the share price that when there are growth hiccups it will hurt the share price. This year will undoubtedly be a transition year for Tesla and shareholders should prepare themselves for more volatility and potential disappointments.
A small beacon of potential upside surprise is the energy storage business which more than doubled installations in 2023 to 14.7 GWh and booked revenue of $1.4bn. It is too early to say, but maybe the energy storage business could be the “AWS of Tesla” meaning that Amazon’s AWS cloud business for many years were growing fast but was overshadowed by Amazon’s e-commerce business before it suddenly became clear that this was where all the profit was. Tesla’s energy storage business could be a repeat of Amazon’s AWS surprise. But it is still early days. Musk wants more control. Should shareholders give him that?
Another key aspect of Tesla that has come about is Elon Musk openly arguing, or some would say demanding, that he should have a stronger influence on Tesla. He has specifically said on X that he wants 25% of the voting rights, and that he supports a dual-class stock structure to give him this control with less economic impact for existing shareholders. The reason is that if he does not get more control he will go do AI and robotics outside Tesla. Is that a good idea to give him more control?
Our view is that a company that is as mature as Tesla should have processes in place and a great management team that whether Elon Musk is CEO or not, Tesla should be able to compete and become a top three EV-maker in the future. The question is whether the competitive landscape has changed to a point where it is more important than ever to be laser-focused on EV production instead of all these side projects. Winning the AI race is tough and robotics is an even more challenging task. Should Tesla shareholders really gamble ressources on these projects over focusing on beating BYD?
Shares are down 8.5% as risks loom this year
What are some of the key risks to consider as a Tesla shareholder over the coming year?
- If interest rates do not come down as fast as the market is currently pricing in then demand will disappoint against expectations.
- There are signs in China and Europe that EV demand is cooling down fast.
- The Elon Musk fight for more control could become a ill-looking fight and public relations disaster.
- Wage pressures and labour union pressures in the US and Europe could continue to put downward pressure on gross margin.
- Competition will increase even further this year with more EV models than ever available to the consumer making it more and more difficult for Tesla to shine.
- A lot of Tesla’s market value is driven by the long-term expected global market share of the EV market. Tesla’s market share has steadily been falling and if it continues in 2024 then it could become a big negative factor for the share price.
Tesla shares were down 6% in US extended trading hours last night, but the shares listed on German exchanges are down 8.5% in today’s session reflecting the failure of Elon Musk convincing the market about the near-term future.
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