Below, we discuss what our premium members need to know going into Q1 earnings in regards to these make-or-break data points.
1. Is Tesla on track to meet their 1.8m unit 2023 production target?
2. Impact of January and April price reductions on overall ASP? Will ASP stay above $47k?
3. Impact of recent lower raw material costs?
4. Automotive gross margins – will they reach Tesla’s guidance of greater than 20%?
5. Earnings relative to consensus expectations
6. Any potential benefit from the Inflation Reduction Act corporate tax credits?
7. Inventory and Cash Flow
8. What is the technical analysis now telling us?
Key conclusion – Based on our analysis, there are reasons to be optimistic that Tesla’s stated goal of gross automotive margins, excluding leases and credits, of greater than 20% are attainable. If so, the market will react positively to the news.
1. Production target
Tesla has a production target of 1.8m car units in 2023, which would be an average of 450,000 per quarter. On April 3, 2023, Tesla released their q123 production and deliveries. Although the 440,808 units is slightly below the quarterly average, it was in-line with market expectations and on track to meet 2023 goal.
We will look for updates to quarterly production and/or any changes to the 1.8m units 2023 target.
2. Impact of price cuts on overall ASP
After announcing price cuts in January so that certain models would qualify for the EV tax credit. Tesla announced further price reductions before the Easter holiday. These were smaller than in the January. The April reductions were as follows
- Model 3 by $1,000
- Model Y by $2,000
- Model S & Y range from between $5,000 to $10,000
Models 3 and Y comprise the vast majority of overall production and the price cuts were fairly modest. After the announced price reductions, this is the estimated starting price levels as of 4/10/23 by cars.com
After the January price reductions, Tesla stated that they expect ASP across all models to be above $47,000. Following the recent April price reductions, we will listen to management commentary if they reiterate this $47,000 ASP target.
3. Impact of lower raw materials
Two important raw materials costs – lithium used in batteries and aluminum used in car frames – have declined in 2023. Both are potential positive tailwinds going forward. According to Daily Metal Price, on a USD/Kilogram basis, lithium is down over 60% ytd. China stopped cash subsidies for EV purchases which had led to an oversupply. Tesla’s last commentary on raw material costs was before lithium’s rapid price decline that started in February.
Aluminum is down almost 15% ytd.
4. Automotive Gross Margins
Rather than Investor’s Day, what is more important for Tesla are two key data points in the upcoming earnings report.
In February, our firm stated:
“The stakes are high for Tesla because if the margins remain healthy, the stock will do quite well. However, if the margins contract, then the bears will be in control. This is a big moment for Tesla, as high average sales price has been a contentious issue for meeting its addressable market. Wall Street will want to see it's possible to do both — serve a wider total addressable market (TAM) with more affordable prices while maintaining a healthy bottom line.”
Automotive gross margins will be the key focus for the earnings call. There are two different metrics. Automotive gross margins, excluding leases and credits, and reported automotive gross margins that are released with earnings. We estimate that the former ended q422 at about 18%. Typically, this margin is discussed during the earnings question and answer. It is the margin we will focus on in our analysis. It goes without saying that any improvement will be reflected in the reported automotive gross margins which ended q422 at 25.9%.
Two key drivers of automotive gross margins, excluding leases and credits, are ASP and COGS per vehicle. In the q422 conference call this is how Tesla guided future automotive gross margins. They stated ASP will be above $47k and gross automotive margins above 20%.
Question: “The next question from investors is, after recent price cuts, analyst released expectations that Tesla automotive gross margin, excluding leasing and credits, will drop below 20% and average selling price around $47,000 across all models. Where do you see average selling price and gross margins after the price cuts?
Zachary Kirkhorn, CFO
So there is certainly a lot of uncertainty about how the year will unfold, but I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.
There was a follow-up if cogs could go back down to $36,000. This exchange provided further insight.
Question: Excellent. Zach, actually, I'd like to follow up on the data point you just gave on cost. If I look back at the COGS per car, you guys bottom close to $36,000 in the middle of 2021. And then the number went up as you had to face with inflation in input costs and the ramp of Berlin and Texas. And this quarter, I think we are close to $40,000 and we peaked maybe close to $42,000 at some point last year.then the number went up as you had to face with inflation in input costs and the ramp of Berlin and Texas. And this quarter, I think we are close to $40,000 and we peaked maybe close to $42,000 at some point last year.
And so my question from here is, how much time do you think it takes you to get back to this kind of $36,000, which would mean Berlin and Texas and those input costs, all that stuff is normalizing, is that like — and that would be like a kind of like a 10% decline in the COGS per car? Is that something we can hope to see this year or is that too optimistic?
Zachary Kirkhorn, CFO
On the raw materials and inflation side, where lithium is the large driver there and this was a meaningful source of cost increase for us, we'll have to see where lithium prices go. And we're not fully exposed to lithium prices, but I think in general, is what we've seen from our forecast here, cost per car of lithium in 2023 will be higher than 2022. So that's a headwind that would have to be overcome to return back to those levels. So, I don't think we'll get there this year, but I think we'll make progress. And we'll continue to find ways to offset these raw material costs that we don't have control over. [Indiscernible] is there anything on that?lithium is the large driver there and this was a meaningful source of cost increase for us, we'll have to see where lithium prices go. And we're not fully exposed to lithium prices, but I think in general, is what we've seen from our forecast here, cost per car of lithium in 2023 will be higher than 2022. So that's a headwind that would have to be overcome to return back to those levels. So, I don't think we'll get there this year, but I think we'll make progress. And we'll continue to find ways to offset these raw material costs that we don't have control over. [Indiscernible] is there anything on that?
The key takeaway is that Tesla’s “current forecast at the moment” and “our forecast here, cost per car of lithium in 2023 will higher than 2022” comments were made before the March declines in lithium and aluminum and April price reductions. At the time, lithium was trading $70/kg, currently it is almost $30/kg. “current forecast at the moment” and “our forecast here, cost per car of lithium in 2023 will higher than 2022” comments were made before the March declines in lithium and aluminum and April price reductions. At the time, lithium was trading $70/kg, currently it is almost $30/kg.
Based on this information, we put together a simple sensitivity analysis between average ASPs and COGS to determine a range of potential automotive gross margins, excluding leases and credits.
Based on the information given in the q4 call, we estimate that margins ended q422 at 18% (yellow, 47,000-40,000/40,000). At the time, Tesla guided for ASPs greater than $47,000 and margins of greater than 20% (orange highlights) and was assuming higher lithium prices in 2023. Hence, in our prior analysis, we assumed that COGS per car would remain constant at around $40k and that higher ASP would be the key driver behind margins above 20%. For example, an ASP of $48k and $49K results in 20% and 23% margins with COGS steady at $40k.
However, given the recent weakness in lithium and aluminum after the q4 call. There is the potential that Tesla’s margins may benefit even if the ASP remains at $47k. For example, if ASP remain at $47k and COG go down to $39k and $38k, margins improve to 21% and 24%, respectively. For reference, the recent low in COGS was $36k.
The ideal scenario is if ASP increased (i.e. $48k) and COGS decreased (i.e. $39k). In this case, the automotive margin will be 23% (gray box)
Put another way, Tesla potentially now has two levers in can pull to increase automotive gross margins – Pricing and lower COGS per car. Now either one or both can contribute to automotive gross margins above 20%. This will remove short-term uncertainty and importantly earn the management credibility.
Perhaps the modest April price reductions in the Model 3 and Y are a reflection of management’s confidence in increasing gross margins on the back of lower raw materials costs.
It is important to point out that given timing differences, this COGS improvement may not be seen until after Q1. There is typically a lag from changes in input costs to when it’s reflected in their financial reporting. This is how Tesla described the timing effect in the q4 call.
Roshan Thomas, VP of Supply Chain
“.. on the non-cells raw material, we begin to capture benefits of indexes tapering out, but due to the length of various supply chains, it does take time before this is reflected in our financials. And while alumina is down like 20% year-over-year, steel is about 30% down year-over-year, the global non-cells raw materials market continues to be influenced by geopolitical situations in Europe, high production cost due to labor cost increases and energy spikes and disruptions due to natural disasters like typhoon in Korea four months ago, pandemic lockdowns.
So, we believe that meaningful price corrections will ultimately come, but it remains uncertain exactly when. In the meantime, we continue to redesign supply chain to make it more efficient and work with our supplier partners to find more efficiencies, streamline logistics and transportation to reduce costs.”
If the potential raw material benefit is not yet reflected in the Q1 financials. To the extent Tesla discusses the potential lower COGS benefit on future automotive margins, the stock will react positively.
Recent comments by Wall Street Tesla analysts
Wolfe Research analyst Rod Lache said this past week that Tesla lowered prices of the Model 3 by $1,000, Model Y by $2,000, and the S and X by $5,000. Notably, these announcements came after Tesla confirmed that U.S. consumers will remain eligible for $7,500 U.S. government purchase credits for most of the Model 3/Y lineup, the analyst tells investors in a research note. While the price cuts in the U.S. may raise questions about vehicle demand, there is "significant cost reduction ahead" for Tesla, the analyst tells investors in a research note. The firm says new investments in Tesla Energy are likely underappreciated by investors.
Deutsche Bank analyst Emmanuel Rosner maintained a Buy rating and $250 price target on Tesla after the Q1 deliveries of 422.9K units were slightly better than consensus. For the rest of 2023, the firm is maintaining its 1.78M unit forecast of 20.6% automotive margins and has confidence that Tesla will deliver on cost and operating efficiencies with its next generation platform, helping deepen its competitive moat.
Earnings expectations
In 2022, Tesla exceeded consensus expectation in each quarter. The reported eps (light blue bar) exceeded consensus (black bar). Going into Q123, consensus have been revising their estimates downward. Currently, consensus is forecasting $0.86 for q123 with a gradual increase over the next 3 quarters.
Given the recent earnings revisions trends despite lower raw materials costs, expectations are fairly muted. Taking into Tesla’s record of beating earnings expectations, we are optimistic that their streak will continue.
Tesla’s 20% gross automotive margin guidance was based on much higher lithium prices. To the extent that Tesla gives any indications that the recent raw material tailwind is sustainable through the rest of the year, consensus will likely have to raise their q2 to q4 earnings estimates.
Cash Flow and Inventory
We will be looking for improvements in FCF that were impacted by an increase in inventory build and a $4.4B purchase in marketable securities. Despite the increase in q4, Tesla’s inventory levels are still much lower than its peers.
Impact of Inflation Reduction ACT (IRA) via Consumer and Corporate tax credit
We recently wrote about the IRA, its key provisions and the potential beneficiaries here. We focused mainly on the corporate tax credit available to corporations. As we discussed, clean energy companies with domestic based manufacturing capacity are the best positioned. Companies that qualify can deduct these tax credits from their costs of sales which has a direct impact on gross margins and earnings per share.
As of now, Tesla has not given any indications if any of their domestic manufacturing qualifies and if they are eligible to collect any of these corporate tax credits. For example, does Tesla’s US energy storage and solar business qualify. To the extent they do provide any financial guidance, this will lead to a re-rating of the stock as it’s not reflected in earnings estimates.
At the moment, Tesla is indirectly benefiting from IRA tax credits that consumers can claim by buying electric vehicles. It is why Tesla enacted the January price reductions so that their cars would qualify for the $7,500 IRA consumer tax credit. Tesla’s models 3 and Y will benefit from higher sales volumes.
How I/O Fund Plans to Manage our Tesla Position:
From a technical perspective, Tesla has bottomed out post the investor day. It appears to be setting up for a fresh high before seeing a bigger pullback on the horizon. Tesla is trading in line with tech equites, so it can be affected by deteriorating macro forces, if this happens, we could see $92 as the next likely target for a major low. As long as we hold $137, this scenario can be avoided.
We could see one more swing high into late April. We do not see this as a buying opportunity. The $231-$235 region will be very strong resistance, which will occur on lower momentum. If this happens, we will look for the following pullback to add.
If instead, we continue to drop from here, as long as any pullback holds the $137 level, we can continue to see the uptrend develop throughout 2023. Below that level, and the odds will start to favor a retest of the low, and likely beyond. In this case, we would stop out, and look for a more favorable entry.
