Category: Autonomous Vehicles

Tesla’s Q2 Deliveries Strong, But What’s To Come?

Posted on by io-fund

This article was originally published on Forbes on Jul 11, 2024,09:48pm EDTForbes Forbes on Jul 11, 2024,09:48pm EDT

After months of being the lowest performing Mag 7 stocks, Tesla saw rapid gains — up 42% in a one month rally, with 37% of those gains in eight sessions — after it reported Q2 deliveries ahead of expectations and a surge in energy storage deployments.

Optimism had also been building for its much-anticipated robotaxi reveal on August 8, but that now has reportedly been pushed back until October. Despite the surge in share price and renewed deliveries growth in Q2 relative to Q1, Tesla still is facing an EV demand problem with production and deliveries set to decline in 2024. Investors are hoping Tesla is at a meaningful bottom, yet that will require significant growth in the back half of the year.

Production & Deliveries Decline

Tesla delivered 443,956 EVs in Q2, about 1% more than consensus for 439,302 deliveries. Despite rebounding to a 57,000 QoQ increase from Q1, Q2 notched a second straight YoY decline, at (4.8%), though this was an improvement from Q1’s (8.5%) YoY drop.

Production fell to the lowest level in seven quarters, falling to 410,831 vehicles – this represented a (5.2%) QoQ and (14.4%) YoY decline in production. This follows production issues the EV maker faced in Q1, primarily impacts to ramping up the refreshed Model 3 in Fremont, and more recent issues with lowered Model Y production in China and five days of production pauses in Germany in June.

Tesla Quarterly Production, Deliveries

Source: I/O Fund

While the QoQ increase in deliveries was a positive sign to see after Q1’s sharp sequential decline, production and deliveries are both peaking in the short term on a TTM basis. Both have pulled back below the 1.8 million mark in Q2 – production totaled 1.769 million vehicles, with deliveries at 1.75 million vehicles. This comes after Tesla warned in Q1 that 2024’s “vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” At the moment, we’re tracking for a (3%) to (4%) decline.

Tesla TTM Production, Deliveries

Production and deliveries both declined below 1.8 million on a TTM basis.

Source: I/O Fund

Q2’s deliveries point to inventory reduction/channel clearing efforts. Q1 had excess inventory of more than 46,000 vehicles, and thus Tesla had lowered production for this excess to be absorbed in Q2.

In Q1, Tesla noted that it began lowering vehicle and subscription prices, and offering leasing and financing deals to help boost demand, and its TTM trend seems to confirm that weaker demand from Q1 is persisting through to Q2. The industry backdrop in the US remains challenged, as EV demand “has grown more slowly than expected due to high borrowing costs, economic uncertainty and consumer preference for gasoline-electric hybrids.”

To ease these fears, Tesla would need to report strong sequential growth in Q3 and Q4, for both production and deliveries. Assuming 5% QoQ growth in production in Q3 and 7% QoQ growth in Q4, for volumes of ~431,370 and 461,570 respectively, and 2% residual inventory in each quarter, Tesla would end the year at 1.737 million vehicles produced and 1.705 million delivered. This would mark a nearly (6%) YoY decline.

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China Deliveries, Market Share Slip

Tesla continues to face major headwinds in China, with China-made deliveries declining on a YoY basis for a third consecutive month in June. We noted to our free readers in November and December 2023 that primary rival BYD’s strong growth presented a tangible and challenging headwind for Tesla in that nation.

Now, we’re seeing more evidence that Tesla’s growth challenges are unique for China. Tesla’s China-made deliveries totaled 71,007 vehicles in June, a 2.2% MoM decline and a 24.2% YoY decline. Stripping out exported vehicles, local deliveries were 59,261, down nearly (20%) YoY but up 7.3% from 55,215 deliveries in May.

BYD outsold Tesla more than 2-to-1 in June, delivering 145,179 BEVs in the month, up 13.2% YoY. Smaller EV rivals Nio and Zeekr also saw strong deliveries, posting record high tallies for June. Industry-wide growth was strong, with NEV sales projected to rise 8% MoM and 28% YoY to 970,000 vehicles. Tesla’s market share dropped below 7% in June, down from more than 11% a year ago as industry growth remains strong and as BYD continues to outsell Tesla significantly in China.

Tesla has an easy comp for July, where China-made deliveries were 64,285 vehicles, including exports. It’s imperative that Tesla break this string of declines in one of its core automotive markets as it heads into Q3. China-made sales were 205,747 vehicles in Q2, or more than 46% of total deliveries.

Energy Storage a Bright Spot, But EPS Impact Likely to be Minimal

Energy storage was a bright spot in Q2, with Tesla reporting a record 9.4 GWh in deployments, up more than 129% QoQ and 154% YoY. Q2’s deployments exceeded historical levels at 4 GWh per quarter, at a maximum.

Energy Storage Deployments (GWh)

Source: I/O Fund

This strong growth in deployments should help the segment contribute more to both revenue and gross profit, as its contribution to gross profit has increased significantly through 2023 and 2024. Energy storage contributed less than 8% of revenue in Q1, but could contribute 14% or more of total revenue assuming revenue more than doubles sequentially.

In terms of gross profit contribution, energy storage contributed 10.9% of Tesla’s $3.69 billion in gross profit last quarter, compared to 3.7% in Q1 2023. Energy storage has a superior margin profile versus Tesla’s automotive segment, at above a 24% gross margin in Q1. However, EPS impacts will be minimal in Q2 despite the likely triple digit QoQ revenue growth, as automotive margin has stabilized in the 18% range.

Assuming energy storage gross margin expands at the same pace in Q1 at 3 percentage points, to a 28% gross margin, the segment could generate $1.05 billion in gross profit, up from $403 million in Q1. This $600 million sequential growth would be a primary driver of sequential growth in gross profit company-wide, likely to $4.7 billion to $4.8 billion in Q2, up from $3.7 billion in Q1.

However, this boost to gross profit, driven by energy storage, won’t translate into a meaningful bottom-line impact. Assuming a 10% QoQ increase in operating expenses, net income would project to $1.85 billion, or ~$0.62 per share, just $0.01 ahead of the current consensus estimate for $0.61.

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Revenue, EPS Growth Muted

Q2 is currently expected to be the last quarter in which Tesla registers negative growth on both the top and bottom line, with analyst estimates pointing to (2.8%) revenue growth to $24.24 billion and (33.5%) adjusted EPS growth to $0.61.

Tesla Revenue, Adjusted EPS Growth Estimates

Source: I/O Fund

Analysts expect Tesla to return to YoY growth in Q3, with revenue growth of 9.2% and adjusted EPS growth of just 2%, suggesting margin headwinds are expected to persist as this comes against a weak comp. It also highlights that despite this recent rapid growth in energy storage, automotive sales and margins will be a primary driver of bottom-line strength or weakness. Should energy storage continue to grow off of Q2’s level of deployments, it may shape up to be a more significant driver in 2025.

Margins Yet To Rebound

We have tracked Tesla’s margins for nearly a year now, assessing how low Tesla’s margins could go in an analysis in August 2023. We had estimated that Tesla’s operating margin would decline to 7.8% in our base case, or to 6.2% in a more bearish case. We also reiterated after Q3 earnings that this continual decline in margins highlights a broader concern for investors in that Tesla has provided no concrete guidance on how far margins will decline.

Tesla's operating margin continues to slide on a quarterly and TTM basis

Source: YCharts

Q1 2024’s actual operating margin was 5.5%, down from 11.4% in Q1 2023. On a TTM basis, operating margin fell to 7.8%, back to 2021 levels, and down from a peak of 17% at the end of 2022. Automotive margin has yet to rebound, and energy storage’s contribution is still not large enough to drive a meaningful inflection in operating margin.

Tesla Automotive Gross Margin

Tesla's automotive operating margin dropped back below 16.4% in Q1, just a fraction above Q3 2023’s low.

Source: I/O Fund

Automotive operating margin dropped back below 16.4% in Q1, just a fraction above Q3 2023’s low. If this is a sign of stabilization in the 16% to 17% range, Tesla is facing a rocky road ahead, as operating margin has weakened consistently with automotive gross margin below 20%.

Conclusion

Tesla’s monster 42% one-month rally follows its Q2 delivery beat and budding optimism for its robotaxi reveal event, but under the surface, Q2’s delivery numbers do not seem quite as strong. TTM production and deliveries both peaked and have begun to decline, and it would take strong double-digit sequential growth through the remainder of the year to break this trend and return to positive YoY growth.

Demand issues look to be persisting as Tesla has lowered production to sell off a large chunk of existing vehicle inventory, with Q2’s production volume the lowest in seven quarters and more than 5% below delivery volume. Energy storage was a bright spot with triple-digit sequential growth, but its contribution down the line is not yet meaningful enough to drive a significant EPS beat.

While many will argue that Tesla is one of the most advanced AI companies in the world, my response is “sure,” but Tesla is also heavily exposed to consumer spending — and this is entirely out of their control. It’s been our contention for some time that Tesla is a Fed-related stock as vehicle financing and EV demand hinges on interest rates.

Interest rates are truly the most important data to track for Tesla in the current environment as high interest rates mean Tesla must lower prices (or vice versa). Therefore, it’s not surprising that Tesla has rallied during a period of increased optimism that a rate cut may be on the horizon.

Some will talk about recurring software revenue from robotaxis as the most important catalyst, but the harsh reality is that the Fed lowering rates is the most important catalyst for Tesla today. That may not be as exciting as AI, but Tesla is one of many tech stocks whose revenue growth and profitability is depends on the Fed instilling a more dovish policy.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

Tesla: Impact of Lower ASPs & Raw Materials, Margins, IRA and More.

Posted on by io-fund

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.

 

Tesla Stock: What You Need To Know About Q1 Earnings

Posted on by io-fund

This article was originally published on Forbes on Forbes Forbes on Apr 14, 2023,06:45am EDT

Two months ago, we wrote that after realizing gains of 31%, it was time to take a time out on Tesla at the $208.31 price when our firm stated: “Right now, our technical analysis is at odds with our fundamental analysis, which is often good news, as it means we will be afforded a lower entry on a stock position we plan to build.”

This analysis proved accurate as the stock topped around the time our last article was written and is trading at $180 today. Price action is key, yet what’s most important from our last article is that we clearly laid out the hurdle that is in front of Tesla – a hurdle that the Investor Day could not clear – as evidenced by a lower price following the action-packed annual event.

Rather than Investor 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.

Below, we discuss what Tesla stock investors (and spectators) need to know going into Q1 Earnings in regards to these make-or-break data points.

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Production target:

Tesla has a production target of 1.8m car units in 2023 and 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.

Production Target Chart

Source: I/O FUND

We will look for indications that quarterly production will increase, if its 2nd half weighted and whether the 1.8m target is attainable.

Impact of price cuts on overall ASP:

After announcing price cuts in January, Tesla announced price reductions before the Easter holiday. The April reductions were smaller than the January ones that were implemented so that certain models would qualify for the EV car tax credit. 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. After the announced price reductions, this is the estimated starting price levels as of 4/10/23 by cars.com.

Estimated Prices for Models

Source: CARS.COMCARS.COM

After the January price reductions, Tesla stated that they expect ASP across all models to be above $47,000. After the April price reductions, we will monitor if Tesla reiterates this ASP target.

The I/O Fund has launched a new$99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy plan.$99/year Premium Newsletter $99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy planbuy plan.

Automotive Gross Margins

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. The former ended q422 at about 18% and is typically discussed during the earnings question and answer. It is the margin we will focus on. Any improvement will be reflected in the reported Automotive gross margins which ended q422 at 25.9%.

The key to Automotive gross margins, excluding leases and credits, are ASPS and COGS per vehicle. In the q422 conference call this is how Tesla guided future automotive gross margins. They stated ASPS will be above $47k and 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?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.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.

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.

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. We estimate that margins ended q422 at 18% (yellow). Tesla has guided for ASPs greater than $47,000 and margins of greater than 20% (orange highlights). In our prior analysis, we assumed that COGs per car would remain at $40k and that higher ASP would result in margins above 20%. For example, an ASP of $48k and $49K result in 20% and 23% margins with COGS steady at $40k.

Average Automotive Gross Margin

Source: I/O FUND

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 ASPs remain at $47k. For example, if ASPS 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. Given timing differences, this COGS improvement may not be seen until after Q1. If it’s not seen in Q1, to the extent Tesla discusses the potential lower COGS benefit on automotive margins, the stock will react positively.

Put another way, Tesla potentially now has two levers in can pull to increase automotive gross margins – Pricing and lower COGs per car. Either one or both can contribute to higher automotive gross margins. The result will be the same in that a gross automotive above 20% will remove short-term uncertainty.

How I/O Fund Plans to Manage our Tesla Position:

From a technical perspective, Tesla has bottomed out post 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.

We have a buy level in mind, which we share with our premium research members. We believe this buy level will set us up for gains in Tesla stock in 2023. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains. We also issue real-time trade alerts when we enter and exit stocks. YTD, our firm has held the two top performing assets in the tech industry – Nvidia and Bitcoin — at high allocations. You can learn more here.

Tesla Stock Price Chart

Source: I/O FUND

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Autonomous Vehicles: Fact vs. Fiction at CES 2019

Posted on by io-fund

Robot dogs from Continental prove that autonomous vehicle hype has gone too far. At CES 2019, Continental announced a way to automate last mile-delivery without requiring a human. This is where the robot dogs come in. The company’s official statement was, “With the help of robot delivery, Continental’s vision for seamless mobility can extend right to your doorstep. Our vision of cascaded robot delivery leverages a driverless vehicle to carry delivery robots, creating an efficient transport team.”

Virtual Representation of Autonomous Vehicles with AI Robots. Source: Continental

The problem with robot dogs, and many other AV gimmicks, is that the industry is not talking truthfully about what where we are with AV and what it will take to put an advanced AVs on the road. This is harmful to consumers who mistakenly believe autonomous vehicles are available for purchase and already on the road today. In fact, 71% of respondents around the world believe they can buy an AV – yet there is not one AV on the market. The top three brands that consumers mistakenly believe distribute self-driving cars include Tesla (40%), BMW (27%), and Audi (21%). It’s also harmful to investors who expect AV technologies to be profitable in the near term of two to three years.

CES is one of the world’s major marketing events where autonomous vehicles were first hyped. The main stage, the keynotes, the sessions, the booths, the competition between rival companies – all of it pushed for bigger and better car demos. Which is why CES is the perfect platform for the announcement of PAVE, which stands for The Partners for Automated Vehicle Education. PAVE is a new coalition that will help educate the public and policymakers about the potential of automated vehicles. Audi, Aurora, Cruise, GM, Mobileye, Nvidia, Toyota, Waymo and Zoox have joined the coalition, which has a central focus on education and safety – and also a focus on more credible information. As stated by Mark Del Rosso, President of Audi America, “Traditional automakers and newcomers are investing billions of dollars in the technology that will make automated vehicles possible. PAVE recognizes the need to invest in public information – in making sure consumers and policymakers understand what’s real, what’s possible, and what is rumor or speculation.”

Just the Facts: Level 2 Automation at CES 2019

Level 2 automation is a reference to the six levels of autonomous vehicles published by SAE International, and adopted as the industry standard for discussing the various stages and evolution of autonomous vehicles. Level 0 is no automation and Level 5 is full automation without a human driver and does not have brakes or a steering wheel. We are at Level 2 right now and the industry is experiencing notable delays in deploying Level 3.

(NOTE:NOTE:  I’ve published extensively on an autonomous vehicle bubble due to investors pouring money into AV technologies that won’t commercially deploy for many years. You can access the analysis on GM here, the analysis on Tesla here and the analysis on how autonomous vehicles are creating a bubble here).

Below are a couple of the more important (and realistic) announcements from CES that will deploy in the very near future.

Nvidia

Nvidia placed emphasis on gaming this year at its Sunday CES press conference with the announcement of the RTX 2060, whereas it has been Nvidia’s tradition to focus on autonomous vehicles (and data center technologies) at the CES press conference. One day later, on Monday at CES, Nvidia launched DRIVE AutoPilot, which will improve advanced driver assistance features, such as enabling lane changes, pedestrian and cyclist detection, parking assist, and personal mapping. This improved automation strengthens the Level 2 vehicles we see on the road today.

Intel

Intel had a showy display that included a Gotham City themed BMW X5 equipped with large screen TVs, projectors, sensors and haptic feedback. Visual distractions aside, the real news from Intel at CES is the company’s ongoing focus on China. Intel did not officially state they are redirecting their efforts from the United States to China, however, the announcements speak for themselves:

  • Mobileye, Beijing Public Transport Corp. and Beijing Beytai Collaborate to Bring Autonomy to China’s Public Transportation
  • 2019 CES: Great Wall Motors, Mobileye Join Forces to Deliver ADAS and Autonomous Driving Solutions in China and Beyond
  • Intel and Alibaba Team on New AI-Powered 3D Athlete Tracking Technology Aimed at the Olympic Games Tokyo 2020

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This is in addition to a hard-to-miss announcement back in July that Baidu was partnering with Mobileye on their Apollo vehicle. At CES 2019, Baidu had on display the successful implementation of Mobileye’s Responsibility Sensitivity Safety (RSS) in the simulation engine of Apollo (I personally tried out the simulator).

Baidu Spokesperson at CES discussing Data-Centric Innovation

It’s important to note that China is not immune to the issues the industry faces in advancing from Level 2 automation to Level 3 automation. China, too, is idling at Level 2 (apologies for the pun). For instance, Great Wall Motors released a statement at CES 2019 that “GWM hope to integrate Mobileye’s solutions into its vehicles. Starting with L0-L2+ within the next three to five years, the companies are also exploring opportunities for Mobileye’s Level 3 products.”

Baidu and Mobileye have both made promises to deliver Level 3 by 2019 and Level 4 autonomy by 2021. These dates were announced in 2017 but there has been no recent updates as to the estimated delivery for L3 – including at CES this year.

Mercedes Benz

The best AV investments over the next three to five years will come from companies who are taking baby steps towards a better and safer driving experience. Mercedes-Benz is one company making the most of Level 2 partial automation by announcing a new CLA class. The CLA class is a more tech-driven option with augmented reality for navigation, and an Interior Assistant that understands indirect voice commands and operational gestures. (Read my analysis on how we have reached a tipping point for AI-powered assistants here). An example of this is when a driver reaches over in the seat, and lights automatically illuminate the area. You can also set a command such as “navigate me home” or ask the voice assistant something complicated like “find child-friendly Asian restaurants nearby with 4-star rating which are neither Chinese nor Japanese,” which was one example given in the demo.

New Autonomous Vehicle Mercedes Benz CLA class. Source: TechCrunch

Takeaway:

Nvidia and Intel had a different tone at CES this year in regards to autonomous vehicles. Nvidia’s launch of DRIVE AutoPilot is a smart strategy to boost sales in the short term while the AV future of Level 3 or Level 4 sorts itself out. The Mercedes CLA class is another great example of a strong Level 2 automation strategy. Intel is clearly betting on China, especially Baidu, although China is not immune to the difficulties of how to get a machine to react like a human. Notably, there was no Level 3 follow up from Baidu at this year’s CES despite promises for arrival in 2019 (although the year is young).

Regardless of make or model, AVs are stuck at Level 2, and there are too high of expectations as to when advanced AV will turn a profit. Therefore, the AV market will struggle as the delivery of reliable and safe automation continues to see delays. Nvidia, Intel and Mercedes are a few companies preparing for the slow down, and I’m betting we will see others do the same this year.