After engaging in a full-on price war amid intensifying competition in the electric vehicle market, Tesla, Inc. (NASDAQ: TSLA) reported quarterly earnings with all eyes on margins. While revenue and earnings grew, its margins accelerated in reverse, prompting a large selloff in its stock, as the share price plummeted 9.74% on Thursday.
The company reported earnings per share (EPS) of $0.91, growing 20% year over year, while revenue rose 47% to $24.93Bn. These metrics delivered a double beat, as Elon Musk’s price-cutting plan took effect in driving record quarterly deliveries. However, amid increasing cost pressures and deteriorating margins, the market did not buy into the earnings beat, as concern around its profitability sparked a side of caution.
Technical
On the 1D chart, a rising wedge formation experienced a bearish breakdown following the earnings release, with the selloff eventually finding support at $262.00. The price action around this support level could be crucial in the opening session on Friday.
An additional breakdown could confirm the formation of a newly established bearish trend, where support could be found at $238.25 and $217.66. Continuous downward momentum could result in the market looking for buyers around $210.30 in a reversal of the recent bull run.
However, if support is found at $262.00 in the Friday session, a correction of the selloff is on the cards to retest the breakdown point at the wedge. A breakthrough at the wedge support could then lead to a test of the daily pivot point at $293.36 in upcoming sessions. The estimated fair value of $316.12 is then within reach, offering a 20% potential upside from current levels.
Fundamental
Over the past three years, Tesla’s share price has been the victim of immense volatility. As optimism around the EV market intensified, investors came flocking into the market, sending the share price soaring. However, as the post-Covid economic headwinds emerged, the high-interest rate and inflationary environment caused consumers to tighten their belts, with Tesla’s vehicles experiencing a considerable slowdown in demand. Nonetheless, despite the immense volatility compared to the S&P 500, Tesla still managed to return an impressive 162.75% over three years. While lagging behind the 277.89% return from rival BYD, they comfortably outperformed the S&P 500 (40.63%). However, their sensitivity to the macro environment should be a cause for concern as we advance, as the macroeconomic conditions remain challenging.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
The focal point around Tesla’s performance has been centred around margins. As the demand for electric vehicles stumbled under the tough economic backdrop, Elon Musk aggressively slashed prices on its main models to stimulate additional demand and drive sales. From a delivery perspective, these cost cuts seem effective, as the company delivered 466,140 vehicles in the current quarter, up from 422,875 in the quarter before, with an 83% year-over-year expansion. Deliveries for its Model S/X were up 19% year-over-year to 19,225, while its most popular Model 3/Y was up 87% to 446,915. They also managed to reduce the gap between their deliveries and production, as production rose from 440,808 in Q1 to 479,900. Year-over-year production has ramped up by 86% from 258,580 in the second quarter of 2022.
However, with its aggressive price-cutting strategy, its top line has benefitted from more deliveries at the expense of its margins. This is evident in the graph below, as there has been a clear divergence between its top line and gross profit margins in recent quarters. In the latest quarter, gross margin came in at 18.2%, falling significantly from the year-ago quarter’s 25%.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
Within the industry, they have historically operated with impressive margins, but the graph below shows their deteriorating position in the latest quarter. Along with its lower gross profit margin at 18%, its EBITDA margin has also significantly contracted, while its operating profit has declined from 11.4% in Q1 to 9.6%, a massive decline from the 14.6% year-ago period. To fuel the fire, Elon Musk also signalled that the company could further cut prices if economic conditions worsen, which does not pose well for their margin concerns in upcoming quarters.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
However, this price-cutting strategy is all part of a longer-term play. Management has pivoted its focus away from profitability toward volume growth. Musk wants to generate high-volume deliveries for its vehicles, and it all centres around the prospect of full self-driving (FSD) capabilities. The idea behind this is that once the FSD software gets approved, there will be a massive asset value change in Tesla’s fleet of vehicles. Therefore, delivering more vehicles makes sense from a long-term growth perspective as Tesla continues to make progress in developing its FSD capabilities. Tesla has rapidly raised its cumulative miles driven with FSD Beta to 300M and remains open to licensing its FSD software to other automotive companies, which could be an additional tailwind for margin expansion.
Along with their FSD capabilities, the highly anticipated release of the Cybertruck is nearing, and Elon Musk has signalled huge demand for when the high-volume production starts taking place. This unique product is set to be launched later this year, which could drive additional top-line growth in upcoming quarters. Furthermore, its energy generation and storage revenue segment is also expanding rapidly, with the latest quarter generating $2.15Bn in revenue, up 74% year-over-year. Another bullish signal for the longer-term growth of Tesla is its vast investment into Research & Development, supercharging networks, and battery processes, which are setting the company up for long-term growth.
Summary
Despite a top-line beat in their latest quarterly earnings, investors were not too optimistic about Tesla’s margin contractions, which caused a significant selloff in its stock. However, with its FSD progress and the tailwind of its Cybertruck-induced demand, there could be a bullish argument for convergence with its estimated fair value at $316.12.
Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, Tesla, Inc.
