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Tesla: Solid Results, Bumpy Ride in the Markets
Q3 2022 performance reaffirmed multi-year demand outlook with a bold statement from Elon Musk on the future value of Tesla. By Benjamin Tan
On October 19th, Tesla ($TSLA) reported record quarterly revenue and solid profit margins, despite supply chain challenges and rising raw material costs. Even with Giga Austin and Giga Berlin still in early stages of production ramp, Tesla produced an operating profit margin of 17.2%, with quarterly cashflows topping $5 billion. Yet, the stock fell afterhours and on the days that followed.
Several likely reasons for market reaction:
Revenue for Q3 2022 fell short of Wall Street expectations, although a stronger US dollar penalized reported numbers
Concerns over demand in China, which were amplified after Tesla dropped prices for Model 3 and Model Y on October 24th
Twitter overhang. This has been a concern in the wider market as Elon Musk is now expected to make good on his offer. Whether or not he needs to sell additional Tesla shares to fill any funding gap, the stock will continue to be under pressure until October 28th, which is the mandated closing date
General macroeconomic concerns around sustainability of appetite for Telsa cars as the company promises to increase production volume by more than 50% each year, even in a recessionary environment
The earnings call is packed with additional information that supports Tesla’s technological leadership, expanding addressable market and execution prowess. See summary at the end of this article for relevant extracts from the earnings call.
Roadtrip: Testing FSD Beta
Last weekend, my partner and I drove for about 4 hours to get from Atlanta to Charlotte. It was a familiar route but this time, we tested out FSD Beta. It was impressive. Back in December 2020 when we paid upfront for the self-driving software - at my insistence since I am a big Elon Musk fan - it did not do much. But fast forward two years, our Model Y practically drove itself. FSD Beta made the drive easier and it is a revelation. It is not hard to imagine a driverless future drawing near.
The below video shows how our Model Y navigates a turn all by itself:
Tesla Shareholders: Keep Calm and Carry On
Amid market bearishness, it is tough to be a long-term Tesla shareholder, especially when Elon Musk is such a polarizing personality. Every corporate development is exaggerated in the media. Musk’s bullishness on Tesla stock (see below) on the earnings call has been distorted by skeptics as pump-and-dump antics in the context of him having to pay up for the Twitter deal.
Concerns over macroeconomic impact on Tesla are valid; no company is immune to external shocks. But what can Tesla shareholders do at this stage? The future remains bright - albeit with some potential bumpiness along the way - and the product roadmap (Semi, Cyber, energy, AI, chips, robotics, recurring software revenue) promises to renew its growth S-curve beyond just selling S.E.X.Y cars worldwide. Tesla is one of the top destination for talents and its innovation stack continues to grow in advantage.
Topsy-turvy markets are tough, but obsessing over market gyrations and trying to read macro tea leaves are probably going to drive investors mad. After doing my work on Tesla results, the weekend road trip was a welcomed respite. Weather in the south is great now, and having Panda Express for lunch - even though we were sitting on a curb at the parking lot - was pretty enjoyable!
In other words, keep calm and carry on.
Highlights from Q3 2022 Earnings Call:
On Q3 performance: "Removing regulatory credits and Austin and Berlin, our operating margins would have been our strongest yet and auto gross margin would have been nearly 30%... Our free cash flows were also a record despite an increase in cars in transit at the end of the quarter, which has a negative impact on working capital"
"Looks like we’ll have an epic end of year. Q4 is looking extremely good. Excellent demand for Q4 and we anticipate growing our vehicle deliveries by a 50% or greater compound annual growth rate as far into the future as we can see. Factories are running at full speed, and we’re delivering every car we make and keeping operating margins strong
On production ramp: "Giga Berlin achieved another milestone of 2,000 cars made in a week with very good quality and is ramping rapidly. Giga Texas should reach this milestone very soon"
On Tesla AI Day: "We’ve seen a massive influx of world-class artificial intelligence engineer and scientist resume. It generated a tremendous amount of interest from some of the best AI researchers in the world. I can’t emphasize the importance of this enough because I think finally it has become clear to the smartest AI technologists in the world that Tesla is among the very best….Tesla and SpaceX are two companies where the smartest engineers want to work
"Wide release of FSD Beta in North America by end 2022…the car will be able to take you from your home to your work, your friend’s house, to the grocery store without you touching wheel"
"We are still a very small percentage of the total vehicles on the road. Of the 2 billion cars and trucks on the road, we only have about 3.5 million. So, we’ve got a long way to go to even reach 1% of the global fleet….We’re very pedal to the metal come rain or shine. So, we are not reducing our production in a meaningful way, recession or not recession"
On share buyback: it is looking likely, pending board approval: "Even if next year is a very difficult year, we still have the ability to do a $5 billion to $10 billion buyback"
On inflation: "We’re optimistic. Commodities on a go-forward basis are on a dropping a lot…Q3 was peak on the commodity side. Cost of shipping has come down tremendously. But in electric vehicles, things like battery-grade lithium are still crazy expensive. There’s more deflation than inflation. We’ll probably see some cost reduction in 2023. I’ll be surprised if we did not"
On the energy crisis in Germany this winter and any potential delays in ramp-up at Giga Berlin as a consequence, the answer is: “we don’t see this as a large risk to the Company. Even if production did go down for a period of time, this is on near term, it doesn’t have any impact on the long term…we have no indication whatsoever that we will have to cut our production in Germany”
On Semi: “we will begin ramping up production of the Tesla Semi through next year… aiming for 50,000 units in 2024 for Tesla Semi in North America. 500 miles with the cargo. Not up. It’s excellent. It’s a long-range truck and even with heavy cargo. We’ll expand beyond North America. Each Tesla Semi would be worth several Model Ys"
(Author is long $TSLA)
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