Tesla Stock Faces Recalibration of Growth Expectations

Posted on April 17, 2025June 30, 2026 by io-fund

It was no surprise that Tesla’s Q1 deliveries came in below estimates, given the multitude of data points across Europe and China that pointed to significant YoY declines in demand. We pointed out in the first week of March when we last covered Tesla’s stock that given this weakness in core regions and transitory production impacts from the refreshed Model Y, there was a risk that Q1 deliveries would fall to well below 400,000 vehicles, whereas consensus estimates at the time were calling for more than 410,000.

Tesla’s stock is now facing a recalibration of expectations after Q1’s delivery report missed by a wide margin, with revenue and EPS growth estimates falling sharply into its earnings report next week. Below, I dig into the risks Tesla’s revenue faces in Q1, growth expectations for the year, and the bigger picture ahead.

Tesla’s Q1 Deliveries Miss Mark

Tesla reported 336,681 deliveries in the first quarter, more than 40,000 shy of the 377,592 estimate, representing the worst performance in two years. This represented a (13%) YoY decline in deliveries, while production fell (16%) YoY to 362,615 vehicles, the lowest quarterly production since Q2 2022. Tesla said that the transition to the refreshed Model Y led to “several weeks” of lost production.

Q1 saw a sharp decline in Tesla’s production and deliveries to the lowest levels since 2022. Source: I/O Fund

These delivery and production figures provide a few clues for the upcoming earnings report and for Q2 as well:

1) Outsized revenue impact due to ASP deterioration and delivery decline

2) Margin headwinds, not just from idle capacity and the refreshed Model Y ramp, but also incentives

3) Possible inventory build-up with production outpacing deliveries by ~26K vehicles, which may force more aggressive financing activity to sell down excess inventory in Q2

4) Recalibration of expectations for 2025 growth

Recalibration of Growth Expectations

The delivery weakness looks to be snowballing into something much larger – a recalibration of growth expectations for Tesla for the full year. Even in the six weeks from our previous update, revenue and EPS estimates for Q1 and for 2025 have continued to drop considerably, marking a rapid shift in expectations impacted by the weak delivery print.

At the start of 2025, Tesla was expected to report $25.98 billion in revenue in Q1, up 22% YoY, with EPS of $0.71, for YoY growth of 58%. These estimates had been little changed since July 2024.

Now, less than a week from Tesla’s report, Q1 revenue is pegged at $21.54 billion, for growth of just 1.1% YoY. Q1’s EPS estimate is $0.43 for a (4%) decline.

Tesla’s Q1 revenue and EPS estimates saw sharp changes heading into the end of the quarter, with revenue estimates coming down more than $2 billion in March. Source: YChartsYCharts

Essentially, in just four months, Tesla has shaved off 20 points of revenue growth and more than 60 points of EPS growth, assuming it meets estimates for Q1. This is a sudden, sharp recalibration of growth expectations for the quarter that has carry-over effects for full-year growth.

Now to the full year: at the start of 2025, Tesla was estimated to generate $116.7 billion in revenue, up nearly 19.5% YoY, with EPS of $3.15, up 30% YoY.

Now, 2025 revenue is expected to be $106.7 billion, $9 billion below where it entered the year and representing growth of just 9.4% YoY, while EPS is estimated to be $2.55, (19%) lower than at the start of the year and representing growth of just 4.6% YoY.

Tesla’s revenue and EPS estimates have fallen sharply since the beginning of the year, with EPS estimates now 19% lower and revenue now nearly 8% lower. Source: YChartsYCharts

In just four months, Tesla’s full year revenue growth estimate has fallen 10 points to the high-single digit range, while its EPS growth estimate has declined more than 25 points to the mid-single digit range. This is not solely due to Q1, as Q2 and Q3 estimates have been revised (2%) to (4%) lower as well after Q1’s weak report.

ASP Weakness Exacerbating Tesla’s Delivery Decline

Q1’s revenue is likely to be pressured as weak pricing weighs on Q1’s weak deliveries, providing additional challenges for automotive revenue, its primary revenue segment at 77% of revenue in Q4.

Tesla’s automotive revenue faces amplifying headwinds in Q1, with weaker ASPs weighing on an already large (13%) YoY decline in deliveries. This presents broader growth challenges given that Energy Storage revenue has decoupled from deployment growth, and as a result, Tesla may run the risk of revenue coming in below $20 billion in Q1.

Here’s why:

Tesla has not increased its ASPs on a QoQ basis since Q2 2022. Compared to last year, ASP was ~$3,700 lower YoY in Q4. This alone presents a 9-point additional headwind to automotive revenue growth (excl. leasing and reg credits) simply due to the swift pace of price declines.

In Q1, ASPs faced a complex environment, from continuing promotional efforts (0% APR loans, referral discounts, etc), combined with price hikes for the Model X, slight increases in average transaction prices in the US near the end of the quarter, and the launch of the Model Y Juniper, which may actually provide a drag to ASP this quarter.

Impact of Tesla’s New Model Y

Model Y Juniper’s popularity in China may dent ASP in Q1, as the new variant is priced lower than its US counterpart: the RWD variant is priced at 263,500 yuan, or ~$36,000, while the Long Range AWD is priced at 303,500 yuan, or $41,500, versus $48,990 for the LR AWD in the US before federal tax credits.

The new model reportedly saw nearly 60,000 orders in the first 5 days in China, becoming the country’s top-selling model in March with 43,370 deliveries. The RWD variant is priced nearly 10% below Tesla’s Q4 global ASP in US$ figures, while the AWD variant is just over 3% higher, suggesting that if a majority of sales volumes were for the cheaper RWD variant, global ASPs will face some pressure.

While Juniper carries a higher price tag than the previous Model Y variant, it was only available in the US in mid-March, leaving little time for deliveries to commence in volume. Tesla also has reportedly discontinued the Launch Series, meaning the new model no longer has its $11,000 more expensive option available for sale, limiting its ability to positively impact ASPs.

Tesla Could See Q1 Revenue Below $20 Billion

Assuming ASPs remain approximately flat QoQ due to the aforementioned factors – slight price hikes, base Juniper variant priced below global ASPs in China with strong deliveries, and financing/incentive offers – automotive revenue could decline nearly (22%) to $12.9 billion. Including approximately $1.2 billion in leasing and regulatory credits, total auto revenue could be just under $14.1 billion, or down (19%) YoY.

Energy Storage decoupled from deployment growth in Q4, as revenue grew less than 2% from Q2’s peak despite 17% higher deployments. On a YoY basis in Q4, deployments rose 244%, yet revenue rose just 113% YoY, a staggering 131 point difference pointing to pricing pressures. This suggests that growth is likely to remain pressured in Q1, as Energy deployments declined more than (5%) QoQ in Q1 to 10.4 GWh.

Should Energy Storage revenue follow that pattern of revenue growth weaker than deployment growth, at something such as a (8%) QoQ decline, or up 73% YoY, while Services revenue increases 4% QoQ, this would project total Q1 revenue out to $19.85 billion.

Even assuming 10% QoQ growth in Energy Storage revenue, or up 106% YoY, a 2% increase in ASP (this would be the first time in 11 quarters), $1.2 billion in leasing and regulatory credit revenue, and the 4% QoQ Services growth, revenue would project out to $20.6 billion.

To hit the current consensus of $21.54 billion, which has declined from $22.46 billion since deliveries were reported, Tesla would need a massive 7.5% QoQ increase in ASP, or up $3,000 sequentially, plus 10% QoQ revenue growth in both Energy Storage and Services, with $1.2 billion in reg. credit and leasing revenue, an unlikely scenario.

The I/O Fund specializes in covering lesser-known AI stocks on our research site with trade alerts and weekly webinars. Learn more here.The I/O Fund specializes in covering lesser-known AI stocks on our research site with trade alerts and weekly webinars. Learn more here.

Lingering Margin Pressures – New Lows Likely Ahead

Tesla is facing a slew of headwinds to margins, as production and delivery numbers are suggesting inventory buildups, alongside known impacts from ramp-related costs. The combination of weaker deliveries and weaker automotive revenue growth is also likely to weigh on already thin margins.

Q4 already saw increased margin pressures from aggressive financing efforts to clear out excess inventory, and average gross profit per vehicle was on the brink of falling below $5,000 as a result. In Q1, Tesla now must contend with much weaker automotive revenue on top of additional ramp related costs for the refreshed Model Y. Ramping Megapack and Powerwall output in Shanghai also is likely to weigh on operating margin in the quarter.

For Q2, margins are likely to face additional pressure from tariff impacts. Tesla acknowledged that tariffs “will have an impact on our business and profitability,” and while the administration has floated “possible temporary exemptions” on imported auto parts and vehicles, nothing is set in stone. Reports from Anderson Economic Group estimate that for US-assembled small crossovers, sedans, and mid-sized SUVs, tariffs costs could be $2,500 to $4,500.

According to NHTSA, for the 2025 model year, Tesla’s vehicles source 20% to 25% of its part content outside the US, primarily from Mexico, opening it up to some tariff risks. Additionally, Tesla was said to have suspended plans to source some components for the Cybercab and Semi following increasing China tariffs, disrupting production timelines for the two vehicles, which were originally expected to start trial production in October.

1.48M More Deliveries Needed to Return to Growth in 2025

We said in our March 6 analysis, Tesla Has a Demand Problem; The Stock is Dropping, that if Q1 did come in weak due to global sales weakness and transitory production impacts, Tesla would have to “make up substantial ground in the back half of the year” to reach optimistic delivery targets.

As you may recall, Tesla quietly shifted its tone on 2025 deliveries growth, with Musk originally stating that 20% to 30% growth was achievable in 2025 in Q3 2024’s earnings call, while Q4’s earnings call shifted the outlook to just a ‘return to growth’.

Now that Q1 deliveries have been officially announced, we can see where Tesla stands on its path to growth. 2024 deliveries totaled 1.81 million, meaning Tesla would need to deliver 1.48 million more vehicles from Q2 to Q4 to return to growth this year.

Q2 is unlikely to ease growth fears, as expectations similarly have been lowered quickly as uncertainty around tariffs and vehicle demand looms. Initial estimates currently point to deliveries between 350,000 to 375,000 for Q2, versus nearly 444,000 in the year ago quarter, though it is still quite early in the quarter and subject to change.

Tesla reportedly halted shipments of Model X and S vehicles to China due to high tariffs, though this is expected to have a minimal impact on deliveries considering the X/S accounted for <5% of global deliveries last year, with China a portion of that. As a whole, China is a major market for Tesla accounting for approximately 37% of deliveries last year, and rising geopolitical tensions could put some of that at risk.

Returning to growth in deliveries this year would require Tesla to deliver over 491,000 vehicles on average each quarter for the rest of the year, based on how Q1 started. This would require Tesla to increase deliveries at ~20% QoQ each quarter, which would culminate in 580,000 in Q4, or a fresh record and pointing to 17% YoY growth, a figure that Tesla has not hit in any of the past nine quarters. Put another way, given Tesla’s annual capacity of >2.35 million vehicles, or 587,000 quarterly, Tesla would need to be producing and delivering at almost maximum capacity come Q4.

The Bigger Picture Ahead for Tesla

As we said in our March analysis, price often bottoms before fundamentals, and it’s clear that Q1 and even Q2 are expected to be the weakest point of the year before the fundamentals improve heading into 2026.

As it stands currently, Tesla is expected to see revenue growth significantly reaccelerate beginning in the back half of the year, with EPS following in 2026. Estimates point to growth bottoming at 0.3% in Q2, before accelerating to 14.3% YoY to end 2025 and 25.7% in Q1 2026, representing a quick 25 point growth acceleration in four quarters.

Tesla’s revenue growth is currently forecast to bottom in Q2 before accelerating to nearly 26% in Q1 2026. Source: I/O Fund

EPS growth is expected to be choppy this year, with only Q2 expected to see growth against a much weaker comp. However, Q1 2026 is expected to see the sharpest YoY growth in EPS in more than three years at 54.2% — again against a soft comp.

We have continuously reminded our readers that margins have been the #1 metric to focus on for nearly two years as margin compression led to 2024’s large YoY declines in EPS. Tesla has had to continue cutting ASPs to promote vehicle affordability, not relieving any of this margin pressure.

In Tesla’s case, however, sentiment often takes precedence above all, in part due to a massive advantage it has in physical AI and (speculative) trillion-dollar opportunities in robotaxis and humanoid robotics with Optimus.

Tesla is witnessing exponential growth in FSD-driven miles, nearly tripling from ~1 billion in March 2024 to almost 3 billion by December 2024. It is also still planning to launch a driverless robotaxi service this year and begin scaling Optimus production. While neither of the two are expected to be meaningful contributors to growth for this year, the materialization of either AVs or humanoid robotics could open tremendous growth potential for the company in the future.

Timing has always been tricky for Tesla, especially when it comes to autonomous vehicles. However, timing investments is one of the I/O Fund’s strengths, actively managing positions with real-time trade alerts for every buy and sell we make in our leading portfolio with 210% returns since inception and 27.6% annualized returns. We also offer frequent deep dive research, weekly webinars and an automated portfolio hedge. Learn more here.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

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:

The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025
I/O Fund Reports 210% Cumulative Return — Ranking Above Wall Street's BestI/O Fund Reports 210% Cumulative Return — Ranking Above Wall Street's Best
The Harsh Truth: Retail Investors Take the Brunt of Market LossesThe Harsh Truth: Retail Investors Take the Brunt of Market Losses
Nvidia CEO Predicts AI Spending Will Increase 300%+ in 3 YearsNvidia CEO Predicts AI Spending Will Increase 300%+ in 3 Years

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

Posted on July 16, 2024June 30, 2026 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.

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.

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.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more here.

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.

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.

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick here

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.

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'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.

Recommended Reading:

How to Participate in Tech: The Million Dollar Question (Video Highlights)How to Participate in Tech: The Million Dollar Question (Video Highlights)
This AI Stock Could Outpace Nvidia’s Returns by 2030This AI Stock Could Outpace Nvidia’s Returns by 2030
AI PC Stocks: Emerging 2024 And 2025 StoryAI PC Stocks: Emerging 2024 And 2025 Story
AI Power Consumption: Rapidly Becoming Mission-CriticalAI Power Consumption: Rapidly Becoming Mission-Critical

Tesla Q4: Moving from Margin Issue to Revenue Growth Issue

Posted on January 30, 2024June 30, 2026 by io-fund

Tesla missed on both the top and bottom line as weak ASP cut into revenues, with the EV manufacturer posting automotive revenue growth of just 1.9% YoY despite a 19.5% YoY increase in deliveries. That statistic is key, as it reflects the idea that Tesla may be moving from a margin issue to a revenue growth issue.

We are starting to see signs of margins stabilizing, with automotive gross margin rising ~85 bp QoQ to 17.2% and operating margin improving 60bp QoQ to 8.2%; however, margins are not in the clear based on recent price cuts and commentary from management regarding cost reductions. This now raises red flags that Tesla will face revenue growth issues moving forward stemming from “notably lower” volume growth and heightened competition from BYD in China and globally. We covered this for our free readers early-on here and here.

Revenue and EPS:

As stated, Tesla missed on the top line and bottom line.

Q4 revenue of $25.17 billion missed estimates by 2.3%, representing YoY growth of 3.5%.
Q4 non-GAAP EPS of $0.71 missed estimates by 4%, representing a YoY decline of (-40.3%).
FY23 revenue of $96.77 billion increased 18.8% YoY from $81.46 billion in FY22.
FY23 non-GAAP EPS of $3.12 declined (-23.3%) YoY from $4.07 in FY22.

Margins:

In Q4, average selling prices declined (4.3%) QoQ to $42,579 as price cuts continued; this also represented a (17.9%) YoY decline from an ASP of $51,887 in Q4 2022. This major weakness in pricing is significantly impacting revenue growth and margins.

GAAP gross margin was 17.6% in Q4, representing a decline of 612 bp YoY and ~300 bp QoQ.
Automotive gross margin (excluding regulatory credits) was 17.9%, a 707 bp YoY decline but improving 86 bp QoQ.

Operating margin was 8.2%, a 784 bp YoY decline but improving ~60 bp QoQ.
Adjusted EBITDA margin was 15.7%, down 652 bp YoY and ~400 bp QoQ.
FY23 GAAP gross margin of 18.2% declined 735 bp YoY from 25.6% in FY22.
FY23 operating margin of 9.2% declined 758 bp YoY from 16.8% in FY22.
Adjusted EBITDA margin of 17.2% declined 637 bp YoY from 23.6% in FY22.

Cash and Debt:

Operating and free cash flow growth was one of the strongest parts of the report.

Cash and equivalents totaled $29.09 billion.
Debt and finance leases totaled $5.23 billion.
Operating cash flow increased 33% YoY to $4.37 billion in Q4. FY23 operating cash flow of $13.26 billion declined (10%) YoY.
Free cash flow increased 45% YoY to $2.06 billion in Q4. FY23 free cash flow of $4.36 billion declined (42%) YoY.

Other Segments:

Energy storage deployments were 3,202 MWh in Q4, up 30% YoY. FY23 energy storage deployments rose 125% YoY to 14,724 MWh.
Energy storage revenues increased 54% YoY to $6.04 billion, generating gross profit of $1.14 billion. Energy storage now represents more than 6% of revenue, compared to less than 5% in 2022.
Solar deployments were 41 MW in Q4, down (59%) YoY. FY23 solar deployments declined (36%) YoY to 223 MW, reflecting global weakness in solar deployments.

Volume Growth Concerns

One of the most telling comments from the Q4 release was Tesla’s call for reduced vehicle volume growth, with CEO Elon Musk saying that the weak growth forecast stems from Tesla gearing up to produce a next-generation model.

Tesla explained that in 2024, its “vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” Production grew 35% to 1.845 million vehicles while deliveries grew 38% to 1.808 million vehicles. Calling for a notable slowdown in volume growth raises some substantial red flags as Tesla has recently prioritized volume growth over margins. This is important here as primary rival BYD has surpassed Tesla as the largest BEV market on a quarterly basis and is on track to likely overtake Tesla on an annual basis this year.

CEO Elon Musk emphasized said just in Q2 that “it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.” CFO Vaibhav Taneja reiterated that in Q3, saying Tesla is “focused on reducing costs, maximizing delivery volumes, and continuing making investments in the future.”

What the bull case needs here is irrefutable evidence that this next-generation platform will aid significant growth in vehicle volumes in 2026, as not only is Tesla increasingly at risk of losing its top spot to BYD, but it’s also now opening the door for revenue growth issues.

We do want to reiterate our stance, that this is not a Tesla-specific issue, rather is widespread throughout the automotive sector. We stated this in the July earnings write-up: “While some will talk about recurring software revenue from robotaxis as the most important catalyst, 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 on borrowed time until the Fed instills a more dovish policy.”

What is Tesla-specific is BYD passing the company last quarter, which we made sure to highlight for our readers. This means Tesla is battling both the FED and China, two foes that are known to either stifle innovation by making cash harder to come by or known to undercut innovation in the United States by creating pricing wars.

From Margins to Revenue Growth Issues

Q4’s earnings highlighted the idea that Tesla may be shifting from margin issues to revenue growth issues, especially as vehicle selling prices remain depressed. In Q4, average selling prices declined (4.3%) QoQ to $42,579 as price cuts continued; this also represented a (17.9%) YoY decline from an ASP of $51,887 in Q4 2022. This major weakness in pricing is significantly impacting revenue growth and margins.

Deliveries grew 19.5% YoY to 484,507 vehicles, but the sharp decline in ASP weighed heavily on automotive revenue (excl. reg credits), which came in at 1.2% YoY to $21.13 billion. This was also evident compared to Q2: Q4’s deliveries were nearly 4% higher than Q2’s, but automotive revenues were just 1% higher because ASPs continued to fall.

Revenue Being Revised Lower:

Tesla has already cut prices twice in January, by (3%) to (6%) on the Model 3 and two Model Y variants in China, followed by (4%) to (8%) cuts on Model Y variants across Europe. This raises the risk that revenue growth in Q1 and Q2 will remain in the single-digits, with revenue revisions being pulled lower for both quarters and the full year.

Q1’s revenue estimate already has been revised 4% lower following Q4’s miss, from $26.8 billion to $25.7 billion
Q2’s revenue estimate has been revised 4.5% lower, from $28.8 billion to $27.5 billion.
As a result, FY24’s revenue estimates has been revised 7% lower, from $118 billion to $109.8 billion, pointing to just 13.5% YoY growth, a 5 percentage point slowdown from 2023.

Commentary:

The conference call shed light on how Tesla was able to drive a small improvement in automotive gross margin, but comments from Musk portrayed the difficulty in finding a concrete bottom for margins.

Management explained that Tesla continues “to see improvements in our per unit cost despite us being in the early phase of Cybertruck ramp. As a result, our auto gross margin improved sequentially.” This was evident with the (5.3%) QoQ decline in vehicle production cost to $35,504, which was likely driven by decreasing lithium prices.

While this decline aided margins by offsetting a (4.3%) QoQ decline in ASP, management added that “while the teams are focused on cost reductions, we are approaching the limits within our current platforms.” This suggests that the pace of cost reductions is slowing and may reach a point where it is unable to fall further, meaning that cost reductions may not be enough to offset the price cuts already seen in Q1.

Musk added that if “interest rates come down quickly, I think margins will be good. And if they don't come down quickly, they won't be that good.” Rates are expected to remain above 4% until December, so vehicle affordability may remain pressured from a consumer standpoint and require more price cuts, thus impacting margins.

When discussing competition, Musk did little to assuage concerns that Tesla may fall behind BYD as volume growth slows. Musk said that the “Chinese car companies are the most competitive car companies in the world. So I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established. Frankly, I think if there are not trade barriers established, they will pretty much demolish most other car companies in the world.”

In 2023, BYD delivered 1.57 million BEVs, up 73% YoY to land about 13% shy of Tesla’s 1.808 million deliveries. Assuming a 20% growth rate for deliveries next year, Tesla would be on track to deliver approximately 2.15 million vehicles, meaning BYD’s growth would only need to be 40% to overtake Tesla next year. Given that BYD is growing tremendously in China, maintaining a growth rate above 40% might not be extremely difficult.

Conclusion

Tesla’s double miss in Q4 came despite a sign of stabilizing margins, with the automaker now opening itself up to revenue growth risks as ASPs are declining nearly as quickly as deliveries are growing. Q4’s automotive revenue rose just 1.9% YoY despite 19.5% YoY growth in deliveries, and high single-digit percentage price cuts in January raise the risk that revenue growth remains weak in Q1 and Q2. Comments about notably lower volume growth in 2024 due to a focus on ramping up a next-generation vehicle platform with a start of production date in late 2025 paves the way for BYD to surpass Tesla’s annual volumes this year.

In light of the weaknesses in Q4, Tesla’s valuation is starting to approach levels where it has previously bottomed: shares are now trading below 5x forward sales, the lowest level since May and approaching January 2023’s bottom at 3.5x.

We will keep watching Tesla’s valuation should shares keep declining. Please follow Knox’s technical analysis and webinars for more details.

Recommended Reading:

Tesla Q4 Earnings Preview: Margins Likely To Slip Again

Posted on January 23, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 18, 2024,03:32pm ESTForbes Forbes on Jan 18, 2024,03:32pm EST

Tesla’s Q4 earnings are on tap after the market close on January 24, closing up a year in which aggressive price cuts helped the automaker top Q4 delivery estimates reach a new record and narrowly beat its 1.8 million volume target. Tesla’s continued actions to improve vehicle affordability throughout the year have been detrimental to margins, as average selling price is falling quicker than production costs.

We covered in the past how Tesla’s lower selling prices in China are having a detrimental effect on margins, as well as assessing how low Tesla’s margins could go. We 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 kicked off Q4 with price cuts in the US for some Model 3 and Y versions after Q3 deliveries missed expectations, though it raised prices later in October for the Model Y Long Range and X Plaid AWD. Tesla also increased the price of the Model 3 and Y in China in Q4, reportedly due to rising production costs. Given these pricing trends, ASPs look set to remain pressured in Q4 while production costs may decline marginally, a combination likely to cause margins to slip again.

It is imperative for the bull case that operating margins show sequential improvement in Q1 should it fall to the low 7% range in Q4. Assuming a ~10% QoQ increase in operating expenses, about in line with historical trends, Q4’s operating margin is projected to be ~7.2%, for a ~40 bp sequential decline. The analysis below looks at what investors need to know moving into Q4, and equally important, a few red flags we see going into Q1 and Q2 to keep an eye on.

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick hereClick here

Automotive Margin Remains a Key Item to Watch

While the promise of full autonomy and its potential value entice some investors, the core story remains margins heading into the Q4 release. Notably, margins topped in Q1 2022, and shares have returned (41.0%) since the end of that quarter.

Source: YCharts

Automotive gross margin excluding regulatory credits topped in Q1 at 30.03%, before slumping to 16.33% in Q3 2023. Quarterly operating margin peaked at 19.21%, before falling to 7.6% in Q3 2023. Wall Street continues to search for a bottom in margins, which look set to decline again based on current trends in ASP and production costs per vehicle.

Source: Tesla, Author Calculations

Aggressive price cuts pulled ASPs below $45,000 in Q3, a level likely to stay in play as recent price hikes for certain models are unlikely to aid pricing given the pace of cuts throughout 2023. Looking forward to Q4, ASP is projected to decline (1%) to (1.5%) sequentially, impacted by recent price cuts and a slightly higher mix of retail sales in China in the quarter, at just over 35% in Q4 compared to 32% in Q3.

Production costs were reported to have risen slightly in China during the quarter, resulting in a price hike, but Tesla likely enjoyed favorable tailwinds to battery pack cost optimization as lithium prices continued to fall through the quarter. In addition, BloombergNEF estimated lithium-ion battery pack prices declined 14% YoY in 2023 to $139/kWh, with passenger BEV batteries falling to $128/kWh. Based on favorable tailwinds from raw materials prices and headwinds from reports of increased production costs, COGS is estimated to have declined between (0.5%) to (1%) sequentially.

As seen in the scenario analysis below, the incremental effects to gross margin from a 0.5% change in production costs are ~42 bp compared to ~50 bp for a 0.5% change in ASP – therefore, it is critical to margins bottoming that production costs decline faster and/or further than prices, or selling prices begin to increase.

Source: Author Calculations

Our current assumptions point to a slightly larger sequential decline for ASP, an unfavorable combination for margins. For Q4, automotive gross margin is projected at ~15.1%, excluding regulatory credits and operating leasing; including operating leasing, automotive gross margin would project to 15.71%, pointing to a ~60 bp sequential decline from Q3’s 16.33%.

Source: Author Calculations

Operating Margin May Be Approaching a Bottom

A sequential decline in automotive margin likely spells another sequential decline for operating margins, though there is increasing evidence that operating margins might be approaching a bottom in Q4.

We highlighted in late August via a competitive analysis framework that we believe Tesla’s Q3 operating margins can decline to a level between Honda and VW, or between 7.8% to 9.6%. However, if operating margins were to reach a level closer to — or below GM — that could be sign they’re close to the bottom. This highlights the broader concern for investors in that Tesla has not provided any parameters nor guidance to assess how low margins may go.

Source: YCharts

Q3’s actual operating margin came in below that level, at 7.6%, landing between Honda’s 8.5% and VW’s 6.2%, while still sitting above GM’s 6.8% margin. With automotive gross margin estimated at ~15.7%, company-wide gross margin is expected to hover around 17.5%, assuming a ~180 bp benefit from regulatory credits and positive impact from Energy Storage and Services. Assuming a ~10% QoQ increase in operating expenses, about in line with historical trends, Q4’s operating margin is projected to be ~7.2%, for a ~40 bp sequential decline.

At that level, the spread between Tesla’s operating margin and GM’s would be less than 40 bp, adding evidence that operating margins are approaching a bottom. Aggressive price cuts look to be easing, a tailwind for ASP inflection, while declining lithium and Li-ion battery prices would add production cost reduction, a second tailwind for margins.

It is imperative for the bull case that operating margins show sequential improvement in Q1 should it fall to the low 7% range in Q4. This is crucial for earnings estimates to begin seeing upwards revisions once more, as forward earnings estimates have fallen significantly over the past six months:

Q4’s adjusted EPS estimate on June 30 was $0.98 for (17%) growth. This was later revised to $0.86 in mid-October for (28%) growth, and the current estimate sits at $0.74 for (38%) growth.
Q1’s adjusted EPS estimate on June 30 was $1.02 for 21% growth. October’s revision saw adjusted EPS at $0.95 for 12% growth, while the current estimate is pegged at $0.81 for (5%) growth.
Q2’s adjusted EPS estimate in mid-October was $1.11 for 23% growth, while the current estimate is $0.92 for 1% growth.

Q1’s trajectory, from pointing to over 20% YoY growth to now suggesting a low single-digit YoY decline raises red flags for Q2’s growth forecast, even after a 2100 bp revision lower. Weaker than expected margins in Q4 and/or Q1 could quickly see Q2’s adjusted EPS figure revised lower for another YoY decline. The bull case would need to have concrete evidence of margins bottoming in Q4/Q1 in order to avoid multiple quarters with YoY declines for EPS. Tesla has already cut prices twice in January, by (3%) to (6%) on the Model 3 and two Model Y variants in China, followed by (4%) to (8%) cuts on Model Y variants across Europe. This raises the risk that ASPs fall much further than COGS in Q1, driving a sequential decline in margins and adding more uncertainty to when and where margins will bottom.

Near-Term Focus on Volume Growth

CEO Elon Musk emphasized in Q2 that Tesla is focusing on volume growth at the detriment of margins, based on his view that unlocking full autonomy will lead to a substantial increase in the value of each vehicle and therefore for Tesla: “it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.” CFO Vaibhav Taneja reiterated this in Q3, saying Tesla is “focused on reducing costs, maximizing delivery volumes, and continuing making investments in the future.”

Q4’s production of 494,989 took FY23’s total production to 1.85 million vehicles, while deliveries of 484,507 took the full year’s total to 1.81 million vehicles — this represented delivery growth of 38% YoY and production growth of 35% YoY.

This focus on volume growth via price cuts comes as Tesla is increasingly at risk of losing its title as the world’s largest BEV manufacturer on an annual basis, after losing the title on a quarterly basis this quarter to BYD. BYD has extended its lead against Tesla in China, especially so in Q4, proving that it can’t be ignored as a fierce competitor on the global stage.

BEV sales for BYD increased 22% QoQ in Q4 to reach 526,409 vehicles, almost 9% higher than Tesla’s total. BYD had nearly matched Tesla’s deliveries in Q3 as both held ~18% of the global BEV market that quarter, and BYD’s rapid growth allowed it to take the throne in Q4. Annually, BYD’s BEV sales came in at 1.57 million, +73% YoY, putting it on track to challenge Tesla’s annual volumes in 2024.

Tesla Technical Analysis

Many of the FAANGs are in the final throes of very mature long-term, uptrend patterns, some of which started in 2009. Many FAANGs are either at all-time highs, or just shy of them; however, Tesla trades roughly 50% lower than its 2021 highs, which signals relative weakness compared to other FAANGs.

Source: TradingView

It’s worth noting the head and shoulders pattern that is close to confirming. This is the red count above, which implies that if Tesla breaks below $203, then the lower target will be sub-$100, as we likely press below the January 2023 lows.

If Tesla is going to have any chance at a sharp uptrend, it would need to break above $264 and $280 in a vertical manner. If this happens, we can start discussing the possibility of $345 – $400. This is the green count in the chart, and it has a low probability of manifesting.

The problem with this scenario is that no FAANG supports this type of move. This would be a 60% – 80% move higher in Tesla. Most FAANGs look like they have topped or have one more minor swing higher before topping.

Even the strongest FAANGs are suggesting a final push higher that doesn’t fit with the above green count. META, being one of the stronger FAANGs, only has room for a 4% – 10% move higher before completing a mature 5 wave pattern off the January low completes. NVDA, being the strongest FAANG, only has room for a 5% – 18% move, at most, before it becomes a better buy at lower levels. Therefore, neither the fundamentals, nor the technicals support this type of large move higher in Tesla, which makes the red count more likely at this time.

Conclusion

The main story for Tesla through 2023 and now entering 2024 has been when and where margins will find a bottom. Margins have declined significantly as Tesla prioritized growing delivery volumes via aggressive price cuts – automotive gross margin has fallen nearly 1400 bps in six quarters, while operating margin has pulled back to the mid-7% range. The two are both projected to slip again in Q4 as price cuts are expected to offset any incremental margin benefits from lowering vehicle production costs.

This rather rapid decline in margins is having a direct impact on forward earnings estimates, with Tesla now expected to report a single-digit YoY decline in fiscal Q1 and almost zero growth in fiscal Q2, compared to prior views for >20% YoY growth. Operating margins are nearing a level where we believe it will find a bottom, while more constructive pricing action through the rest of 2024 and/or continued improvements in lowering production costs will also help aid margin recovery.

If you own Tesla stock, or are looking to own Tesla, we encourage you to attend our weekly premium webinars, held every Thursday at 4:30 pm EST for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis.

Tesla’s China Market Share Continues To Slide

Posted on December 12, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 7, 2023,10:58pm ESTForbes Forbes on Dec 7, 2023,10:58pm EST

Tesla’s China struggles are persisting, as the American OEM saw its monthly sales decline substantially year-over-year in November, continuing a string of weak growth that began in August.

Tesla’s primary China rival BYD continues to see solid vehicle sales growth, and is poised to potentially become the market share leader in Q4. In an analysis last month “Tesla Sells 33% of Vehicles Below Average Cost, BYD Pulls Ahead,” our firm had reported that BYD more than doubled Tesla’s China sales in October and that BYD “is set to overtake Tesla in terms of quarterly BEV deliveries.”

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick hereClick here

Tesla Falls Further in China

In November, Tesla’s China-made EV sales fell about (-17.8%) YoY to 82,432 vehicles, marking the largest YoY drop since December 2022 when Tesla cut output and prices in response to rising inventories.

Vehicle sales did increase approximately 14.3% MoM from October, a positive sign of improvement from the stagnation seen since the peak in June at 93,680 vehicles. Despite the 14.3% MoM growth, Tesla is still tracking at less than half the BEVs as BYD and will need much more than one month to maintain its lead globally.

Source: TESLA, BYD, GASGOO

November and December are typically the strongest seasonal months for China’s EV market, a common theme seen in other auto manufacturers’ deliveries for last month. December has also tended to be the strongest month for Tesla — aside from in 2022 — so the true test for Tesla will be exceeding June’s total as December has traditionally done in the past. That would represent MoM growth of ~13.6% and YoY growth of ~67.9%, a reversal back to double-digit growth after a 4-month string of weakness.

In 2021, Tesla saw similar weakness in October and November that then set up for a strong December. 2023 could follow that pattern with a strong December boosted by the refreshed Model Y and Model 3 Highland – Tesla will need to show at least 95,000 units in volume in December (or a minimum of 50% of BYD’s BEV volume) for the bullish thesis but if it misses under 90,000 then China continues to be too big to ignore, and we will look for an opportunity to buy lower. We are on the sidelines until then.

Source: TESLA, BYD, GASGOO

I/O Fund Equity Analyst Damien Robbins previously reported last month that Gigafactory Shanghai “is essentially maxed out in terms of the volume of vehicles that it can churn out, so October’s stagnation raises more questions about how Tesla will regain market share in China. With BYD’s strong growth in Q3 and Tesla’s slide in September, the American EV maker saw its NEV market share fall more than 300 bp QoQ from 12.98% in Q2 to 9.89% in Q3.”

October’s stagnation saw Tesla’s market share deteriorate further: Reuters reports that Tesla’s “share of the country's EV market dropped to 5.78% in October from 8.7% in September.” That marks a swift decline in market share – down 1220 bp from Q2’s 12.98% in just over a quarter.

Tesla’s market share is sliding as Tesla’s deliveries are lagging and rival deliveries are growing; Tesla’s October sales grew 1% YoY compared to 30.1% YoY for the passenger EV market. For November, EV sales are estimated to increase 29% YoY to approximately 940,000, per the China Passenger Car Association. A CPCA official said that “every carmaker is making a dash to the year-end as they try to meet their sales targets.” In November, Tesla’s below-market growth rate of (-17.8%) YoY compared to 29%, is looking to set the carmaker up for further market share losses as Chinese domestic rivals’ deliveries continued to witness strong growth:

BYD’s NEV sales reached a record and second straight month above 300,000, with BEV sales rising 49% YoY to 170,150.
Great Wall’s NEV sales rose for an eighth consecutive month, rising 143% YoY to 31,824 vehicles.
Changan’s NEV sales increased nearly 53% YoY to 50,598.
GAC’s NEV sales grew 49% YoY to 50,231 for the month and 80% YoY to 490,925 YTD.

BYD Matches Tesla’s BEV Market Share

Due to China’s large population and the importance of this country in terms of demand, BYD is set to surpass Tesla on global sales next quarter.

BYD’s EV growth flatlined in November on a MoM basis, with growth just below 1% from October’s levels. However, November’s tally of 301,378 vehicles (BEV+PHEV) marked a second straight month with more than 300,000 deliveries. For a direct comparison to Tesla, BEV sales increased 49% YoY and nearly 3% MoM to 170,150 units, taking Q4’s to-date total up to 335,655 vehicles. As a result, BYD is poised to overtake Tesla’s BEV sales in Q4 – BYD is on track to surpass 500,000 BEVs delivered, whereas Tesla is forecasting a volume of at least 449,000 vehicles in Q4 to reach its 1.8 million target for 2023.

Source: TRENDFORCE

With BYD’s strong growth through Q2 and Q3, combined with a strong start to Q4, it’s also on track to soon become the top brand globally in terms of BEV market share, taking the throne away from Tesla. On a YTD basis up to Q3, Tesla held approximately 20.1% share of the BEV market, compared to BYD’s 15.9% share; however, in Q3, BYD matched Tesla’s market share at ~18%, per TrendForce data.

The team at the I/O Fund strives to be early and objective, highlighting last month for our readers that Tesla was set to lose market share to BYD as China growth stagnates. Read that analysis here.I/O Fund strives to be early and objective, highlighting last month for our readers that Tesla was set to lose market share to BYD as China growth stagnates. Read that analysis here.

For Q4, BYD is set to surpass Tesla’s delivery tally by 10% or more, based on current growth rates and seasonal strength. Some of China’s major EV brands, including BYD and Li Auto among others, “have either cut prices or increased the royalties for customers since late November to boost year-end sales,” which could help BYD further extend such a lead.

Conclusion

The main story for Tesla investors remains the margin picture, and when margins will bottom as automotive and gross margin continues to deteriorate. We outlined this in detail here: “Tesla’s Margins: How Low will They Go?”

Tesla is heading towards a weaker position in China than what mainstream media is currently reporting as vehicle deliveries in the back half of the year have been relatively weak, allowing main rival BYD to catch up rather quickly, to the point where it may overtake the top spot in terms of market share. If not in Q4, then it looks to be inevitable come 2024.

China is a core market for Tesla for production, deliveries and exports, with Gigafactory Shanghai accounting for ~52.1% of Tesla’s 1.32 million total deliveries through Q3. Though Tesla has been raising Model Y prices over the past month, this slippage in market share raises concerns that margins will continue to suffer through Q4 and into 2024.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis

Recommended Reading:

Tesla Sells 33% Of Vehicles Below Average Cost, BYD Pulls Ahead

Posted on November 14, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 9, 2023,09:23pm ESTForbes Forbes on Nov 9, 2023,09:23pm EST

BYD more than doubled Tesla’s China sales in October as Tesla’s sales slipped on a month-over-month basis, while NEV startups showed strong sales numbers across the board. China’s new energy vehicle (NEV) industry continues to exhibit solid momentum, with September seeing NEV sales rise about +22% YoY and October estimated to see around +34% YoY growth. As a whole, China is expected to once again be the primary driver of global EV sales this year, with volumes forecast to reach or exceed 8.5 million units, or more than 60% of the projected 14 million global volume.

Tesla has been in the spotlight recently — its margins have contracted significantly over the past few quarterscontracted significantly over the past few quarters as it prioritizes price cuts. China is Tesla’s most important market as it currently represents the highest remaining total addressable market (TAM), therefore the recent weakness is not something to ignore, especially as domestic rivals pick up their pace of growth.

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick hereClick here

BYD Trumps Tesla in China as Sales Stagnate

BYD’s delivery numbers have shown tremendous growth in Q3 and the start of Q4, as opposed to Tesla’s stagnation as consumer demand looks to be shifting in favor of local OEMs. XPeng and Li Auto both posted record October numbers with ~300% YoY growth, while NIO saw +60% YoY growth. BYD’s increased dominance in China is more visible with sales data by model: 5 of the top 6 highest selling models in October were BYD, combining for nearly 214,000-unit volume, compared to the Model Y’s 53,249 volume for the month.

Source: I/O Fund

BYD has seen steady growth in NEV and purely BEV sales since May, and since June, BYD has posted five straight record months for NEV deliveries, rising from 253,046 in June to close out Q2 to more than301,000 in October June to close out Q2 to more than301,000 in October to kick off Q4. Deliveries grew +39% YoY in October, the slowest growth rate so far this year, where monthly sales have averaged +77% YoY growth. In terms of BEV sales, for a more apples-to-apples comparison to Tesla, BYD recorded +60% YoY growth to 165,505 deliveries and exports of China-made vehicles in October – more than double Tesla’s total . At that rate, BYD is set to overtake Tesla in terms of quarterly BEV deliveries, being on track to surpass 500,000 BEVs in Q4, whereas Tesla is forecasting a volume of at least 449,000 vehicles in Q4 to reach its1.8 million target for 2023.

Source: I/O Fund

On the other hand, Tesla’s China sales peaked in June at 93,680 vehicles, with September seeing a nearly (12%) MoM and (11%) YoY decline to 74,073 vehicles, including exportspeaked in June at 93,680 vehicles, with September seeing a nearly (12%) MoM and (11%) YoY decline to 74,073 vehicles, including exports. October saw a fractional YoY increase of just +0.6% while registering a consecutive MoM decline of (2.6%), as the OEM continues to lag the growth of the broader NEV industry.

The Profitability Picture

NIO and XPeng are struggling to find a shift to profitability with elevated levels of R&D and losses piling up, whereas Tesla is facing margin troubles, exacerbated by its reliance on China. The reason here is simple: Tesla continues to sell vehicles in China below its average cost, from Q4 2022 through Q3 2023. Currently, the base Model Y is priced around $36,200, and the revamped Model 3 saw a 12% increase in its base price to $35,800 – both still below Tesla’s average cost of ~$37,487 per vehicle in Q3.

The recently announced Model Y price hikes may help alleviate the issue, given the Model Y is accounting for just over 70% of monthly sales in China, but the past four quarters have seen China’s ASP trail average cost per vehicle by (3%) or more.

Source: I/O Fund

Q1 saw Tesla deliver 137,429 vehicles in China (excluding exports) for an average ASP of $35,589.
Q2 saw China’s ASP rise ~$1,000 to $36,578 on a +14% QoQ rise in deliveries to 156,676 vehicles. ASP was aided by a price increase in May and a higher mix of Model Y sales.
Q3 saw ASP decline once more to $35,953, as deliveries slipped (12.2%) QoQ to 139,624

Although Tesla has made progress in bringing its cost per vehicle lower over the past four quarters, ASP has declined at a quicker rate due to extensive price cuts. However, the sheer volume that China contributes – just under 33% of YTD deliveries at 433,729 vehicles – combined with ASP trailing average COGS means that Tesla’s margins will likely not recover above 20% until China’s ASP shifts back above average COGS. It is important for cost of goods sold (COGS) to be below average selling price (ASP), as the difference between the two is the gross profit. In Tesla’s case, China’s ASPs being below average COGS are weighing negatively on gross profit.

We previously discussed how Tesla will likely continue to lower prices to increase its leading EV market share to stave off competition which will intensify over the next few years. In a competitive analysis framework, we projected Tesla’s Q3 operating margins to decline to a level between Honda and VW, or to 7.8% compared to most recent 9.6%. Operating margin for Q3 was 7.6%, just below our base case and above our bearish case model. For a deeper dive into Tesla’s margin story is evolving, read more here and here.to 7.8% compared to most recent 9.6%. Operating margin for Q3 was 7.6%, just below our base case and above our bearish case model. For a deeper dive into Tesla’s margin story is evolving, read more here and herehere and here.

Source: I/O Fund

This is increasingly evident when looking at Tesla’s automotive gross margins. Automotive margin saw a pinch in Q2 2022 as COGS rose, before falling below 20% in Q4 2022 as China ASPs shifted below the COGS curve. Margins have fallen each quarter this year as China ASPs remains below the curve, dragging on global ASP which continues to slide as a result of price cuts.

However, BYD is showing strength in margins this year – BYD’s automotive gross margins surpassed 25% in Q3, rising from 20.7% in Q1 and from 22.8% in the year ago quarter. Automotive gross margin has also markedly improved from 15.6% in Q1 2022, an expansion of 1010 bp, while Tesla’s margins have contracted 1390 bp since peaking that same quarter at 29.65%. BYD has cut prices of some of its popular models, but not to the degree that it has become detrimental to margins.

China’s Importance to Tesla

Tesla’s weaker sales numbers in China in September and October do raise some demand concerns, as these two months typically are the start of seasonal strength lasting through December. It also raises broader concerns within its margins and revenue growth, due to the outsized influence China has on Tesla’s production and deliveries.

Gigafactory Shanghai accounts for slightly more than half of Tesla’s current installed production capacity of ~1.85 million vehicles, with the plant capable of operating at a ~0.95 million annual run rate. Tesla noted in Q3 that the “Shanghai factory has been successfully running near full capacity for several quarters, and we do not expect a meaningful increase in weekly production run rate.” In Q3, Tesla sold 222,517 China-made vehicles, with 82,893 exported. On a YTD basis, Tesla sold 699,056 China-made vehicles, with 265,327 exported. That means China accounted for ~51.1% of Q3’s total deliveries and ~52.1% of the 1.32 million total deliveries YTD.

Shanghai is essentially maxed out in terms of the volume of vehicles that it can churn out, so October’s stagnation raises more questions about how Tesla will regain market share in China. With BYD’s strong growth in Q3 and Tesla’s slide in September, the American EV maker saw its market share fall more than 300 bp QoQ from 12.98% in Q2 to 9.89% in Q3.

While September’s MoM weakness could be chalked up to a production line upgrade in anticipation of the revamped Model 3, October’s MoM stagnation either points to a slowdown in production off full capacity at Giga Shanghai (annualized rate of ~0.86M vs ~0.95M max), or a build-up in China-made inventory. Neither scenario would be much of a positive for Tesla heading into China’s seasonally strong Q4, as both could suggest more demand weakness through the end of the year.

Conclusion

The main story for Tesla investors at the moment is when margins will bottom, as automotive and gross margin continues to deteriorate. China offers a major clue for when and where margins will bottom, given that Tesla relies on the country for about one-third of its deliveries and just over 20% of its revenues.

BYD is excelling at executing during this price-competitive time, with deliveries reaching a new monthly record while margins expand. On the other hand, Tesla has seen monthly sales in China stagnate, with ASP in the country sliding again in Q3. With China’s ASP currently going on five quarters below Tesla’s average COGS, the bottom for margins is still not in sight.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Tesla’s Margins Fall Again

Posted on October 19, 2023June 30, 2026 by io-fund

Tesla reported Q3 earnings that missed on both the top and bottom lines. Revenue of $23.35 billion missed by $0.79 billion, while non-GAAP EPS of $0.66 missed by $0.07. Margins continued to slide, with gross margin declining ~30 bp QoQ and ~720 bp YoY to 17.9%, and operating margins falling ~210 bp QoQ and ~960 bp YoY to 7.6%. A shift in product mix and price cuts led to a lower ASP during the quarter.

We wrote at the end of August that Tesla’s Q3 operating margins can decline to a level between Honda and VW – between 7.0% to 8.5%, with Q3’s actual 7.6% coming in just shy of the midpoint there. If operating margins were to reach a level closer to 6.0%, like GM, that could be a sign they’re close to the bottom. The continual decline in margins highlights the broader concern for investors that Tesla still not provided any guidance to assess how low margins may fall. The OEM’s Q3 update stated the goal remains unchanged: “reducing cost per vehicle… while maximizing delivery volumes.”

In that regard, Tesla kicked off October with another price cut in the US after Q3 deliveries missed expectations. The cuts, for certain Model 3 and Model Y versions, took the base Model 3 price down approximately -3.1% to $38,990. Another cut to spur demand signals that the bottom still may not be in yet for margins, given that the base Model 3’s latest price point sits just ~4% above Tesla’s average COGS of $37,500 in Q3.

Revenue and EPS:

Revenue of $23.35 billion missed expectations by (3.3%). This represented YoY growth of +8.9%.
Automotive revenue of $19.625 billion grew by +5.0% YoY.
GAAP EPS of $0.53 declined (44.2%) YoY, driven by the decline in gross and operating margins.
Non-GAAP EPS of $0.66 missed expectations for $0.73, representing a YoY decline of (37.1%).

Margins:

Gross margin of 17.9% missed expectations for 18.0%.
Operating margin declined for a fourth straight quarter to 7.6%.
Automotive margin (excl. leasing & regulatory credits) was 15.75%, declining from 17.52% in Q2 and 26.35% in the year-ago quarter.
Adjusted EBITDA margin declined ~260 bp QoQ and ~710 bp YoY to 16.1%, as adjusted EBITDA fell (24.2%) YoY.
GAAP net margin of 7.9% represented a decline of ~290 bp QoQ and ~740 bp YoY.

Cash & Debt:

Tesla’s cash and investments rose by ~$3.0 billion from Q2 to reach $26.08 billion, driven by ~$2.19 billion in net borrowing for vehicle and energy system financing and ~$0.85 billion in free cash flow. Free cash flow declined (74.3%) YoY from $3.30 billion in the same quarter last year, impacted by a $1.79 billion decline in operating cash flow and a $0.66 billion increase in CAPEX. TTM free cash flow of $3.71 billion was at the lowest level since Q4 2020.

Operating cash flow of $3.30 billion declined (35.1%) from $5.10 billion in the same quarter last year but improved +7.9% sequentially from Q2. TTM operating cash flow of $12.16 billion reached the lowest level since Q4 2021.

Tesla reported ~$4.39 billion in total debt and finance leases, up from $2.33 billion in Q2, driven by the $2.19 billion surge in net borrowings under vehicle and energy financing.

Other Key Metrics:

Energy storage revenues increased +39.6% YoY to $1.56 billion as deployments rose +90% YoY to 4.0 GWh, and services and other revenue increased +31.7% to $2.17 billion. Energy storage posted a gross profit margin of 24.4%, while services saw a gross profit margin of 6.0%. Tesla said that “pay-per-use Supercharging remains a profitable business for the company, even as we scale capital expenditures” to expand the network further. Supercharger connector deployments increased +31.4% YoY to 51,105.

Despite the top and bottom-line misses and a miss on Q3 deliveries, Tesla critically kept its 1.8 million delivery target unchanged. That suggests at least 475,000 deliveries in Q4, a new high for Tesla and approximately +1.9% higher than Q2’s 466,140 tally. Tesla has more than 2.23 million installed annual capacity, excluding the Cybertruck in pilot production; there should be no issue on the production side to reach the 1.8 million target. Price cuts continuing already in Q4 suggest that demand may remain weak throughout Q4.

A Closer Look at Margin Troubles:

Automotive revenues increased +5.0% YoY, as weaker pricing offset a +28% YoY rise in deliveries to 435,059 vehicles. On a sequential basis, automotive revenues declined (7.1%), as deliveries declined (6.7%) from Q2. Weaker ASPs in the quarter, at approximately (3.1%) lower than Q2, contributed to that sequential decline.

A worrisome trend is emerging in both ASPs and automotive gross margins as Tesla continues to cut vehicle prices. Automotive gross margins (excluding vehicles subject to leases) fell below 16% in Q3, dropping from 17.52% in Q2 and down from 28.46% in Q3 2021, with little relief along the way down.

CFO Zachary Kirkhorn stated back in January this year that that “Tesla would not go below margins of 20% [including leasing and regulatory credits] and an average selling price of $47,000 across models.” Automotive gross margin including leasing and credits declined to 18.7% in Q3, down from 19.2% in Q2 and 21.1% in Q1.

ASPs have fallen (16.7%) YoY and (20.1%) from a peak in Q2 2022 at ~$55,690 per vehicle to reach ~$44,493. That represented a decline of ($1,469) from Q2’s ~$45,962, more than offsetting the $421 reduction in COGS per vehicle during the quarter.

Looking forward to Q4, should an improved mix offset price cuts to leave ASPs virtually unchanged, Tesla more than likely will have to bring COGS per vehicle lower by at least ~1.5%, to reach point below $37,000, to bring automotive gross margins back above 17%. If COGS per vehicle does not fall to that degree, ASPs will need to rise by at least 1% in the face of price cuts to bring that inflection in margins.

Earnings Call:

Tesla’s earnings call highlighted the difficulties in finding a concrete bottom for margins, as the OEM continues to “invest significantly in AI,” while noting that “there will be enormous challenges in reaching volume production with the Cybertruck, and then in making a Cybertruck cash flow positive.” Therefore, “R&D expenses continued to rise due to Cybertruck prototype bills and pilot production testing combined with spend on AI technologies like full self-driving, Optimus and Dojo.” Increased CAPEX has been detrimental to free cash flow metrics, while heightened R&D will also drag on operating margins – which Tesla inadvertently signaled have yet to bottom.

Tesla said that its “Q3 operational and financial performance was impacted by planned downtimes for our factory upgrades. This was necessary to allow for further factory improvements and production rate increases. Despite such factory shutdowns, our cost per vehicle decreased to approximately $37,500. We saw sequential decreases in material cost and freight. Reducing the cost of our vehicles is our top priority.”

While cost reductions can help prop up margins, Tesla also signaled that price adjustments may continue over the next months to quarters: “as interest costs in the U.S. have risen substantially, it has required us to adjust the price of our vehicles to keep the monthly cost in parity. We’ve tried to offset such adjustments via focus on reducing costs. However, there is an inherent lag in cost reductions, which in turn impacts margins.” Elon Musk added later in the call, “if interest rates remain high or if they go even higher, it’s that much harder for people to buy the car, they simply cannot afford it.” Rates advancing higher would likely force more price reductions to keep those monthly payments relatively close to parity, while higher rates for longer could keep vehicle prices depressed for longer, thereby weighing down on margins.

Conclusion:

Margins were the major story heading into Q3’s earnings and remain the major story moving forward, as Q3’s weaker operating margin print at 7.6%, combined with declining ASPs and automotive gross margins, signal that Tesla is still not much closer to finding a bottom.

Q3’s earnings call supported that view, as Tesla pointed out that reducing vehicle costs remains a key focus but emphasized that affordability is driving price reductions as interest rates rise. Given that there has been no relief in rates, Q4 started with a ~3.1% price cut to the base Model 3 in the US alongside other price cuts.

Tesla did reiterate its 1.8 million target for the year, pointing to a possible record Q4 for production and deliveries, with more than enough installed capacity to reach that goal. While a resumption of sequential delivery growth will be a positive, the question again comes down to how many price adjustments will occur during Q4 and if margins can withstand such adjustments to find a bottom soon.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.

Recommended Reading:

Tesla’s Margins: How Low Will They Go?

Posted on August 31, 2023June 30, 2026 by io-fund

As the I/O fund looks to position itself for the remainder of 2023. Fundamentally, we’re avoiding ‘Crocodile Jaw’ situations where the stock price is going up but fundamentals are decelerating. This is one of the reasons we greatly reduced our Tesla position for a ~60% gain.

Tesla stock has rallied through most of 2023 during a time when consensus was estimating sales to grow +23% y/y but earnings to decline 15%. The main driver behind the decline in earnings estimates is that Tesla has decided to lower prices to increase volumes at the expense of margins.

Starting in Q322 through Q223, operating margins have declined from 17.2% to 9.6%. Initially, Tesla cited making sure certain models qualified for the EV tax credit and later higher interest rates as the primary reasons for lowering prices.

Higher interest rates are effectively a price hike that increases monthly payments for those who finance their purchases. Tesla recently announced 84 month financing to lower monthly payments. Reducing the sales prices also helps lower monthly payments. Meanwhile, increasing EV inventory at dealerships and discounting at an industry level are likely another contributing factor.

However, the challenge of higher interest rates is not unique to Tesla. All OEMs face the same obstacles. Below are reported operating margins for the major global OEMs from Q322 through Q223. Either they were relatively stable for the Germans and Koreans or bottomed in Q123 and have improved in the case of the Japanese.

Despite this, Tesla is the one OEM whose operating margins have continued to decline.

Source: Y-Charts

It’s Not Just Macro

This highlights that there are other forces at work beyond the macro. We believe it points to Tesla implementing a pricing strategy to gain market share. Taking into consideration the competitive factors at work will help in trying to decipher Tesla’s pricing strategy and how that will impact operating margins for the remainder of 2023. It is through this competitive analysis framework that we will try to parameterize how low Tesla operating margins can go.

For this analysis, we chose to focus on reported group operating margins. Although this metric includes non-EV businesses, we believe it’s the most objective and public measure to provide an apples-to-apples comparison across the auto landscape globally.

At the end of Q422, Tesla's operating margin was 16%. To provide some context, at the time this was greater than the German OEMs. Tesla had firmly positioned itself in the premium segment.

The Germans have been dealing with their own challenges integrating EV offerings, and have been trying to catch-up with Tesla. Perhaps sensing its competitive moat within the premium market was fortified, this gave Tesla an impetus to lower prices further to attack the mass market segment. In Q223, Tesla’s operating margins declined to 9.6% after enacting a series of price cuts.

Currently, this is how Tesla’s operating margins compare to its main competitors. As can be seen below, Tesla’s Q223 reported operating margins are below those of most of the major US, German, Japanese and Korean OEMs.

Source: Y-Charts

How Low Can Operating Margins Go?

Strategically, Tesla will likely continue to lower prices to increase its leading EV market share to stave off competition which will intensify over the next few years. Tesla’s electric market share peaked at 78% in 2018 and stood at 62% in 2022. By 2026, Merrill Lynch estimates it will decline to 18%

Source: Merrill Lynch

In the most recent Q2 call, both Elon Musk and Zachary Kirkhorn, former CFO, signaled Tesla‘s focus will continue to be on volumes.

Musk

“So, I think it’s sort of, it would be — I think it — it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.”

Kirkhorn

“We continue to work towards our goals of maximizing volumes on our vehicle business … in a way that generates the capital to continue our pace of R&D and capital investments.”

Through this competitive analysis framework, we believe Tesla’s Q3 operating margins can decline to a level between Honda and VW. Taking the midpoint, operating margins may go to 7.8% compared to most recent 9.6%. If operating margins were to reach a level closer to — or below GM perhaps — that could be sign they’re close to the bottom. This highlights the broader concern for investors in that Tesla has not provided any parameters nor guidance to assess how low margins may go. It is why we significantly reduced our position.

We have two base cases.

Base Case 1 is that Q3 operating margins are between Honda’s and VW at 7.8%.

Base Case 2 is more bearish in that they reach GM’s at 6.2%. For now, we believe Base Case 1 is the most likely. Consensus opm estimates are higher and consensus will have to revise down their Q3 and Q4 operating profit estimates if either case materializes.

In the medium term, there are reasons to be optimistic that Tesla’s strategic moves may bear fruit and its margins will rebound. In addition to lowering prices, the move from the CSS to Tesla’s NACS EV charging standard may help Tesla take market share away from those who have not yet announced plans to shift to NACS. Namely, Toyota and Honda who together have 25% automotive market share in the US. Meanwhile, Tesla deserves credit for maintaining its premium brand perception despite lowering prices. For now, the Tesla brand is almost synonymous with EVs. The refreshed Model 3 may further strengthen Tesla’s position in the minds of consumers.

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereSign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick here

Tesla’s Price Action:

We continue to see a bifurcated market, which has been one of the leading themes in 2023. Some markets/stocks have likely put in tops, while big tech, especially those names perceived to be involved in AI, suggest another high is likely. Tesla falls into this camp, where one more high is still on the table before we have to deal with a bout of extended volatility. You can read more about our broad market analysis here.

The question for Tesla investors is whether the January low was a major low, or do we have one push lower before a major low is struck? There are some stocks, like NVDA and NFLX, for example, that will likely see similar bouts of volatility in the coming months, yet they have a high probability of making a lower high. Tesla could fall into this category.

There are two large counts that I’m tracking based on the current price information that account for these scenarios.

Blue – The big picture here has TSLA making a higher low in the coming period of volatility. The key to this count will be a large pullback that both holds $147 and is a 3-wave retrace. If this happens, it will be setting up a great buying opportunity.
On a shorter-time horizon, TSLA has ended the topping region from $300 – $325. We could see one more swing into the $325 region. This will be very strong resistance to monitor, if we get another push. The August low around $213 will be very important. If we break below this level, then it is likely the top is in.
Red – on a shorter time horizon, the above analysis applies to both counts. Where this one differs will be in the pattern of the larger retrace. Instead of a 3-wave retrace, it will have to be a 5-wave pattern that breaks below $147. If this happens, the odds will be quite high that we will see one more low before a major buying opportunity presents itself.

If you own Tesla stock, or are looking to own Tesla, we encourage you to attend our weekly premium webinars, held every Thursday at 4:30 pm EST. This week, we will discuss Tesla, as well as a handful of other AI plays – what our targets are, where we plan to buy as well as take gains.

Tesla – Post Q1 23 takeaways

Posted on April 20, 2023June 30, 2026 by io-fund

The market’s primary focus going into Tesla’s Q1 23 earnings report were signs of stabilization and improvement in automotive gross margins that management guided for in the Q422 earnings call. Although the normalized $0.85 eps was in-line with consensus, Tesla did not meet their margin targets. In doing so, Tesla indicated that they have changed their 2023 strategy to increasing volumes at the expense of margins.

As a result, visibility into margins for the foreseeable future have been reduced and management credibility has been dented.

We are going to review the key points we outlined in our preview note.

Pricing + Margins

An important part of our previous analysis was based on Tesla’s Q4 comments on ASP and automotive gross margins, excluding leases and rent credits, after significant January price reductions. This is what Tesla said after those reductions.

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.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.

In Q123, Tesla automotive gross margin less credits was 19% vs consensus of 20.7%.

Meanwhile, reported automotive gross margin, which include regulatory credits and leasing, was 21.1% and operating margin was 11.4% compared to 25.9% and 16.0% in Q422, respectively.

The main drivers were lower prices and factory related ramp up costs. Higher expenses related to warranty adjustments on older Model S and X were also a factor but were described as one-off.

Critically, the market would likely have given Tesla a pass if they gave indications that its margin targets were still intact. Rather than that, Tesla stated that the margin declines were reflection of Tesla’s change in business strategy to lower prices to increase volumes at the expense of margins.

This is how Elon Musk described the business focus for 2023.

“I want to reiterate the philosophy by which we're operating the business this year. Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses.”

“We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy.

So we do believe we're like laying the groundwork here, and then it's better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy. This is an extremely important point.”

Tesla’s rationale is that once a car is purchased, this allows them to collect higher margin revenue in the future such as software. It’s somewhat akin to if Apple cut prices on their latest iPhones to get new users and says they’ll make much over the course of the phone’s lifetime via apps and services.

This strategy shift raised questions on pricing and future margins. In contrast to Q422, they would not provide any specifics.

Question: What is the process to make auto pricing adjustments? What variables do you consider? How frequently do you review pricing?

Elon Musk

Yeah, I think this is not something that we can really talk about. It's just — we do our best to evaluate the production output, macroeconomic conditions, and we make a decision. But it's — and unless there's something you'd like to add, Zach.

Zachary Kirkhorn

I think that's right. I mean, as a team, we review where we stand globally on a weekly basis and certainly, I can't get into the details of the reasons why certain decisions are made. But it is something that's very actively managed by a subset of the leadership team.

Question: what do you anticipate 2023 automotive gross margins ex-credits will be at the company's current pricing levels?

Zachary Kirkhorn

Yes, I can start off on this one. This is a difficult environment to make a projection like this. There's a lot of macro uncertainty. There's also headwinds and tailwinds. And this is basically a question I think that's asking about viewpoint and where costs will go. And within costs, there's a set of costs in which we do control the set of costs in which we're kind of subject to what's going on in the macro world.

Question: Back on the automotive gross margins. So, I think, I guess, a few months ago, even after major price cuts, you felt pretty strongly that 20% automotive gross margin was still probably a reasonable floor. Obviously, the macro has gone worse and additional price cuts have happened. Is there anything else that has changed in terms of the outlook? Is it just the macro deteriorating? Is it the competitive landscape? Anything else that's sort of like makes you think differently around the full year? And is there a way, therefore, to frame a floor?

Zachary Kirkhorn

“Yeah. About half of the miss against that previous conversation last quarter is attributed to adjustments we made in pricing in the second half of the quarter. I mean, I guess you could argue that that lowers the floor in a sense. We've also made pricing adjustments so far this quarter. So that brings it down further.

About the other half of the miss in Q1 was attributed to things that are nonrecurring. So I mentioned these in my opening remarks. It's a warranty adjustment for cars that were previously produced but not part of the pedigree of cars we're building now and some autopilot-related deferrals as we make some technology changes here that this deferral should get recognized once some of the software catches up. So those two things are not repeating. So hopefully, that helps answer your question.”

Elon Musk

“Yeah. I mean there's really two macro factors that are tricky. The biggest being the interest rate. So if there's a very high Fed rate or interest rates are very high, that is — every time the Fed raise the interest rates that's equivalent to increasing the price of a car. It makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So that's — so it's just almost directly equivalent to a price increase, is there any kind of interest rate increase.

Then the other factor is whenever there is uncertainty in the economy, people will generally postpone new — big, new capital purchases like a new car. This is a natural human reaction. So if people are reading about layoffs and whatnot in the press, they're like, well, they might be worried about — they might be laid off. So then there'll be naturally a little more hesitant than they would otherwise be to buy a new car. Now this is just the nature of the auto industry. But there is — there will be a trans amount of pent-up demand for new cars. So it goes through cycles.”

Question: I just wanted to first just follow-up on your comments in your letter about leveraging your cost position as others struggle with unit economics and also taking into account the lifetime revenue, actually in a way that most other automakers will never see just given your service network and supercharging and other attributes. Can you just maybe give us a sense of how far you'd be willing to take this? Are there brackets around the range of initial margin that you'd be comfortable with? And again, any color that you might provide on the updated range of margins that you'd expect in the auto business?

Elon Musk

I think we may have answered this question or tried to ask this question a few times. But it's difficult to say what the margin will be. It depends on what the macroeconomic environment is like. So for example, if the Fed were to lower the rates, that would be super helpful for demand. If they raise them, that just raises the interest costs that buyers have to pay for to buy a car. So it reduces affordability and therefore, reduces demand. So it's — but if — like if we look past, say, this year or like go sometime next year, middle of next year, so I think things are looking really — I think, like I said, albeit if there's some major geopolitical wildcard that turns up. But in the absence of that, I think I would be very optimistic about middle of next year, end of next year.

Zachary Kirkhorn

“Just to add to Elon's comments, just two other points. What's really important for us this year in addition to just managing the day-to-day of the business but is also investing in, as Elon mentioned, what 2024 and 2025 will look like. And so using the cash generated from the sale of products today and reinvesting that, this is very important for us. And I think that what happens to margins over the next couple of quarters that only matters in the context of what that means for our ability to reinvest into 2024 and 2025.”

“And we have a lot of space before that becomes something that we have to revisit our investment plans. And so we're planning to keep the business healthy. But I just want to caution folks about reading too much into what happens over the near-term here because we're very focused as a company on making sure that when we exit this macroeconomic situation, this company is positioned in the best possible way.”

Key takeaways from the above comments

· Kirkhorn’s last statement is important. He seems to be indicating that there could be continued margin pressure in the short-term as part of their pricing strategy

· Musk’s comments indicate the consumer is feeling the pressure from higher interest rates and weaker macro and Tesla has needed to respond by cutting prices

Raw materials

On the positive side, Tesla will begin to see the benefit of lower lithium prices in the 2nd half of the year. They also are beginning to contract lithium forward at attractive prices.

Elon Musk

Lithium has dropped a lot. It's worth mentioning that the price of lithium has dropped significantly.

Zachary Kirkhorn

Yes. And that's the piece that we expect to see more impact on in Q2. And, generally, as a company, we do expect commodity prices to come down and have a more meaningful impact in the second half of the year.

Elon Musk

Yes.

Karn Budhiraj

We are seeing, as Elon mentioned, quite a bit of softening in the lithium carbonate market. This was — six months ago, we were trading at like $85,000 a ton, and today's spot price is about 26%. So there's been a dramatic decrease in that.

Of course, we were able to take advantage of low lithium pricing earlier on with fixed price contracts. And we find that this is going to be another opportunity — opportune moment to basically extend that into the later half of the decade. But we — at the quantities we're procuring, we're not as impacted by the spot market because we have those contracts in place, and we're just going to be going and doing more of that.

Production, Inventory and Free Cash Flow

Tesla has maintained their 1.8 million unit production guidance.

Inventory days increased slightly from 13 to 15 days leading to a decline in fcf of $0.4B vs $1.4B in Q4. Tesla stated they are trying to balance their regional mix of production and deliveries that is impacting quarter-end cash free cash flow.

Conclusion

Based on Tesla’s prior comments, we entered Q123 with very clear catalysts in mind that did not materialize. We did not expect this sudden shift in their business strategy nor has Tesla provided any tangible insights into their new pricing strategy.

They did make it a point to say that their margins were still industry leading. However, at 11% group operating margins, they are now lower than the Germans and just above the US, Korean and Japanese manufacturers. Tesla suggested that margins may go lower in the future.

This strategy shift is an important change in our investment thesis for Tesla.

We expect there to be continued margin uncertainty for at least the next couple of quarters and earnings estimates to be revised down. The I/O team believes that these factors will present headwinds for Tesla stock until there is more clarity.

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

Posted on April 16, 2023June 30, 2026 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.

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’s Q1 Deliveries Miss Mark

Recalibration of Growth Expectations

ASP Weakness Exacerbating Tesla’s Delivery Decline

Impact of Tesla’s New Model Y

Tesla Could See Q1 Revenue Below $20 Billion

Lingering Margin Pressures – New Lows Likely Ahead

1.48M More Deliveries Needed to Return to Growth in 2025

The Bigger Picture Ahead for Tesla

Production & Deliveries Decline

China Deliveries, Market Share Slip

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

Revenue, EPS Growth Muted

Margins Yet To Rebound

Conclusion

Revenue and EPS:

Margins:

Cash and Debt:

Other Segments:

Volume Growth Concerns

From Margins to Revenue Growth Issues

Revenue Being Revised Lower:

Commentary:

Conclusion

Automotive Margin Remains a Key Item to Watch

Operating Margin May Be Approaching a Bottom

Near-Term Focus on Volume Growth

Tesla Technical Analysis

Conclusion

Recommended Reading:

Tesla Falls Further in China

BYD Matches Tesla’s BEV Market Share

Conclusion

BYD Trumps Tesla in China as Sales Stagnate

The Profitability Picture

China’s Importance to Tesla

Conclusion

Recommended Reading:

Revenue and EPS:

Margins:

Cash & Debt:

Other Key Metrics:

A Closer Look at Margin Troubles:

Earnings Call:

Conclusion:

It’s Not Just Macro

How Low Can Operating Margins Go?

Tesla’s Price Action:

Recommended Readings:

Recommended Reading:

1. Production target

2. Impact of price cuts on overall ASP

3. Impact of lower raw materials

4. Automotive Gross Margins

Recent comments by Wall Street Tesla analysts

Earnings expectations

Cash Flow and Inventory

Impact of Inflation Reduction ACT (IRA) via Consumer and Corporate tax credit

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