Source: US Stock Research Institute
Author: Livy Investment Research
$Tesla (TSLA.US)$The company's third-quarter delivery performance was poor. Although the number of downgrades to consensus forecasts increased over the past three months and set a lower standard, there were similar trends in growth and profitability over the period regarding expectations. Revenue grew slightly less than 9% year over year, compared to an average forecast of 13%, while earnings per share ended up being $0.66, below market expectations of $0.73. The automobile industry's gross margin after deducting credit for the quarter was 16%, which was also lower than the average consensus forecast of about 18.2%. At the same time, it also deteriorated from 18.1% in the previous quarter. The stock showed a slight increase in after-hours trading due to performance, highlighting investors' continued sensitivity to the volatile performance of the underlying business in recent quarters. Before today's US stock market, Tesla's stock price continued to fall. Up to now, the decline has increased to more than 7%.
This is largely a departure from the stock's historic level of elasticity, as Tesla's stock valuation has yet to recover from the downtrend following the publication of underperforming third-quarter deliverables. While management's latest comments seem to downplay Tesla's emerging demand risks and margin pressure, there's no doubt that signs of weakening investor confidence are being reflected in the stock's price, particularly given the stock's declining valuation premiums in recent months.
While Tesla has an unrivalled competitive advantage over auto OEMs, and there are still a variety of levers to drive, the risk of stock premiums being normalized is slowly becoming a reality — especially given that the company's timeline for achieving some of the speculative long-term growth drivers that underpin its lofty goals, the premiums are becoming increasingly uncertain.
Tesla's delivery failure in the third quarter initially triggered a knee-jerk sell-off, causing the stock to open down 2%. It was later clarified that poor performance was only due to extended factory shutdowns during that period, and then the stock quickly rebounded in the afternoon. This has caused the market to refocus on Tesla's growing demand risk, and management is trying to allay this concern in its latest earnings review. Citing poor sales performance in the third quarter and scheduled restructuring caused a one-time interruption due to global plant shutdowns, management reaffirmed their confidence that at least 1.8 million vehicles will be delivered by the end of the year. However, the endless cycle of sharp price cuts — management has tried time and again to downplay this price cut, calling it a “dynamic pricing” advantage — continues to highlight pressure from broader macroeconomic uncertainty and increased competition in Tesla sales.
Tesla also faces ongoing challenges in America's largest domestic market. The combination of increased competition and economic challenges has led to continued price reductions.
The price of Tesla's entry-level RWD Model Y series products in the US has dropped 50%. Like the Model 3, Tesla's two low-cost best-selling models currently cost significantly less than the $48,000 average car price. However, it hasn't boosted Tesla's demand growth in the US. In addition to extended factory shutdowns in the third quarter, we think the latest delivery missteps are also a warning of emerging demand risks.
On the one hand, delivery times for Model 3/Y custom orders have been normalized to less than two months, and today's purchases will be ready by the end of November. This highlights that Tesla's historic “supply issues” have been largely solved — even with extended factory downtime in the third quarter, the impact on sales volume exceeded expectations. On the other hand, Model S/X deliveries are still weak compared to the sharp price cuts implemented throughout the year. The last price cut came into effect in early September, bringing the price of high-end models to the lowest level ever. Overall, Tesla's leading market share in the US has begun to show signs of structural decline in recent quarters.
The slowing growth trend has overshadowed management's repeated guidance of reaching 1.8 million vehicles for the year. According to deliveries completed so far this year, Tesla is still around 476,000 vehicles away from reaching its annual sales target. This meant a 9.4% month-on-month increase (or 17.6% year-over-year) in deliveries, indicating that production at Tesla's global plants needed to quickly return to normal levels after the summer shutdown. However, this move will also coincide with the potential challenges facing the upcoming launch of Cybertruck, which has left the sales target set by management mixed prospects and further eroded investors' confidence in the stock in the short term.
Back at Cybertruck, its multiple delivery delays added uncertainty and concerns about potential “obstructions” behind the scenes. Although Musk has reiterated his promise to “deliver cars this year,” the lack of progress details is beginning to erode some of the stock valuation premiums brought by the new car business in Tesla's portfolio. Admittedly, the car has aroused great interest from consumers, and to date, the car has received close to 2 million pre-orders.
Although there were previous concerns that the number of electric pickups offered by electric vehicle startups and traditional car manufacturers in recent years may cause Tesla to lose its first-mover advantage in the Cybertruck field, he said that this concern has not yet become a reality. Eighteen months after the F-150 Lightning was sold, the electric version of Ford's best-selling F-Series pickup still accounts for only a nominal share of the automaker's total sales volume. Meanwhile, competitor Rivian has made progress in increasing production, but is also having trouble driving demand to accelerate. This may be due to Tesla's steadfast fan base, and/or Cybertruck—albeit a pickup truck—is establishing its own new automotive sector, in stark contrast to the electric alternatives currently on the market.
However, despite this, the extended delay in Cybertruck deliveries is likely to dampen consumer interest in the car. And uncertainty about the upcoming timeline for revenue drivers to grow could also erode investor confidence and damage the stock's current level of performance.
A key component of the valuation premiums Tesla has established in recent years comes from investors' confidence in eventually achieving FSD-driven growth. This includes not only the realization of existing deferred revenue from FSD subscriptions, but also potential monetization by deploying robot taxis and licensing the technology to other OEMs. Given that FSD technology is expected to drive much of Tesla's post-sales revenue expansion over the long term, FSD has been the foundation for protecting the stock from recent price cuts and the resulting profit contraction.
However, increased stock volatility in recent months may reflect a rift in previously unwavering investors' confidence that FSD-related products will ultimately contribute to Tesla's growth and profit trajectory. While this emerging technology claims to improve road safety and save lives, the gradual deployment and use of FSD by drivers is also driving gradual regulatory review of its viability and preparedness. These barriers also further obscure the visibility of the already opaque FSD's full deployment and monetization schedule, adding pressure to the persistence of Tesla stock's current level of valuation premiums.
To restore profit margins to 20% or more, Tesla needs to further reduce investment costs through large-scale production. Since batteries are the main source of costs for electric vehicle manufacturing, improving this technology and expanding the scale of related production will be the key to easing Tesla's recent profit pressure.
However, these ambitions may take years to reach and have a meaningful impact on Tesla's profits. Although Tesla makes electric vehicle batteries in the US and is therefore eligible for points under the Inflation Reduction Act (“IRA”), it currently shares some of the benefits with battery supplier Panasonic at a 50/50 ratio. Recall that Panasonic still produces all of Tesla's traditional 2170 batteries at its dedicated plant in Giga Nevada, while Tesla is responsible for assembling the battery packs. This enabled Tesla to receive 50% of the $35/kWh battery credit, and the full $10/kWh battery pack credit when Giga Nevada currently has a capacity of about 35 GWh to 38 GWh, in accordance with IRA regulations. Meanwhile, the company has secured a $100/kWh battery production credit for the increased production capacity of 45 GWh currently in Giga Austin.
Looking ahead, Tesla is considering plans to add another 100 GWh of production capacity at its Giga Nevada plant, which will produce 4680 batteries from battery to battery pack, which would make it eligible for a full IRA credit of $45/kWh — a welcome plus for its automotive profit margins. Taking into account the average battery capacity of 75 kWh per vehicle, this gave Tesla an IRA rebate of $3,375 per vehicle, or more than 10% of the current vehicle's recommended retail price. Add to Giga Austin's current 100 GWh production capacity, and Tesla will benefit from full credit eligibility for nearly 3 million battery packs (assuming an average of 75 kWh battery packs per vehicle). This means that without considering future battery production improvements, it will save more than $10 billion in incremental costs, offsetting the estimated $1.2 billion annualized impact of current price cuts.
This level of battery production capacity also makes it possible for Tesla to further become a tier 1 battery supplier in the future, because in the foreseeable future, its production will far exceed its automobile production. The lithium refining capacity currently being built by Tesla further confirms the relevant ambition, which enhances the company's key supply advantage in the era of electrification. The potential to become a tier 1 battery supplier may give Tesla an advantage in competition with its main competitor, BYD, which is currently the second largest electric vehicle battery supplier after the Ningde era.
However, the associated credit benefits and potential incremental revenue streams brought by being a Tier 1 battery supplier may take years to be realized, not to mention the obvious impact on Tesla's profits. While this is a step in the right direction, the extended monetization period did not provide much respite from the stock's anticipated recent fluctuations, nor did it support investors' confidence.
Adjusting our previous predictions of Tesla's actual delivery errors and underlying performance in the third quarter, we expect revenue for the full year of 2023 to grow 20% year over year to $97.5 billion. According to management's guidance, full-year deliveries are expected to be 1.8 million vehicles, and car sales (excluding credit) are expected to increase 18% year over year to reach $79.4 billion in 2023. Tesla's sales growth is expected to continue decelerating in the middle of this century, and by 2030, this situation is likely to ease somewhat with the addition of another model based on the next generation of low-cost platforms currently being developed by Tesla.
As a result, profitability is likely to remain under pressure in the short term, especially considering that further price cuts are Tesla's main strategy for resisting competition and coping with the macroeconomic impact on consumers' car affordability. In addition to higher after-sales revenue and the potential realization of cost efficiency in large-scale battery production.
In terms of valuation, anticipated cash flow combined with our basic predictions for Tesla means Tesla's permanent growth rate will exceed 6% based on current market valuations. The figure was determined through a discounted cash flow analysis using a 9.4% weighted average cost of capital (WACC), which takes into account Tesla's capital structure and risk profile.
The stock's implied perpetual growth rate at its current trading level highlights its high premium relative to Tesla's electric vehicles and car manufacturing peers, as well as the expected pace of economic expansion in its core regions of operation. Much of the stock's premium could be attributed to future deployments of highly profitable subscription software and features (e.g., FSD) and other post-sales services. Based on the overall analysis, the basic hypothetical price target is set at $221, which includes 10 times FSD sales in 2032 and 2 times car sales in 2023.
FSD revenue of $36.6 billion in 2032 was calculated based on a conservative 50% acceptance rate assumption (current average of about 19%), estimated sales volume of 4.2 billion vehicles, package price of $17,500 (higher than the current $12,000), and assuming that by then, expectations for approval of Level 3+ autonomy would be fully incorporated into the income statement.
The 10x market-to-market ratio used is consistent with the average multiple observed among highly profitable, high-growth software peers, and is in line with the consideration that FSD can be deployed on a large scale at near-zero marginal costs. Meanwhile, the 2x price-earnings ratio of vehicle sales in 2032 is consistent with the historical average valuation of “mid-cycle OEMs in the US” and the current average of the S&P 500 index to reflect Tesla's leadership position as a driver in the electric vehicle market.
Editor/jayden