Apple Bets On The Emerging Markets Growth Story

Posted on June 5, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Jun 1, 2023,08:15am EDTForbes Forbes on Jun 1, 2023,08:15am EDT

The smartphone market continues to be hit hard in q1, with prices down 20% and shipments down 13%, according to Canalys. Despite double digit decline across the industry, Apple delivered marginal growth on its iPhone sales at +1.5%. According to Counterpoint Research, Apple grew smartphone shipments by 1 million year-over-year from 59 million in Q1 2022 to 58 million in Q1 2023. The decline of (1.7%) was better than the (14%) decline for the global smartphone market.

Source: BETH KINDIG

According to Apple’s management, the reason the company was able to overcome smartphone weakness was due to sales in the emerging markets. The company’s CFO, Luca Maestri, said in the earnings call, “We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis.”

Within the emerging markets, India is a primary focus for Apple due to a growing middle class. According to a survey from a non-profit, the middle-class population has grown from 14% in 2004-05 to 31% in 2020-21. Tim Cook also points to the fact that the country is at a tipping point. “There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.”

Although Apple does not break down India sales figures, Bloomberg News reported that sales grew by 46% YoY to about $6 billion for the trailing twelve months ending March 2023. According to a Wedbush analyst, “Apple is now aggressively looking at India from both a production and retail expansion over the coming years that the firm believes will be a strategic poker move for Cupertino that could ramp annual revenue to $20 billion by 2025 in India.”

Tim Cook recently visited India in April and opened two company-owned retail stores. Apple was the second biggest revenue generating brand in India in 2022, second only to Samsung as it gained 18% of the total value of smartphone shipments, according to research firm Counterpoint.

The company also plans to make India a manufacturing hub and this move is seen as the company’s efforts to rely less on China. JP Morgan mentioned in its research note last year that the company plans to produce 25% of all iPhones from India by 2025. However, it could take a few more years to reach the 25% level. According to Bloomberg News, the company now produces 7% of total iPhones from India and this is up from 1% in 2021.

Apple supplier Foxconn announced recently that the company plans to invest $500 million to set up a manufacturing plant in India. It had also announced in March that it received approval from another state in India for a $968 million investment. Similarly, Foxconn has plans to expand its existing manufacturing plants in India.

There are 2 billion Apple devices active in the world and there are 659 million smartphone users in India, compared to 975 million in China and 276 million in the United States. With India being second place, it makes sense that Tim Cook is focused here.

Source: Statista

According to Morgan Stanley analyst Erik Woodring, “The firm's 2023 revenue and EPS forecast increased by 1% and 3%, respectively, post-earnings and while the firm calls out iPhone 15 and an AR/VR headset as the next catalysts, it adds "don't sleep" on the emerging markets and India story at Apple.”

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Apple’s Brand Needs a Catalyst

Warren Buffet was recently asked why he is invested in Apple and his reply was “If you’re an Apple user and somebody offers you $10,000, but the only proviso is they’ll take away your iPhone and you’ll never be able to buy another, you’re not going to take it. If they tell you if you buy another Ford car, they’ll give you $10,000 not to do that, you’ll take the $10,000 and you’ll buy a Chevy instead.”

Not surprisingly, Apple is one of the world’s most valuable brands, rivaled only by Amazon and Google.

Source: I/O FUND

Despite this strong brand, the next chapter for Apple has been slow to materialize. As seen below, wearables have not become the “next big thing” for Apple with $8 billion or so in revenue per quarter. Emerging markets are promising, yet at the $20 billion per year or $5 billion per quarter, Apple will struggle to move the needle for some time by relying on this strategy alone.

Earlier this month, we published an article “Apple’s Stock in Focus: More Profitable Than Banks” where we stated:

“Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.”

Services remain a long-term opportunity for the company to monetize its installed base of over 2 billion active devices. Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

To illustrate how effective Apple’s move into finance tech has become, the cornerstone product, Apple Pay, currently has 75 percent adoption among iPhone users. This is up from 10% in 2016. In addition to taking on banks, Apple is also competing with Mastercard and Visa with features that allow merchants to use iPhones and iPads to send and receive payments. The long-term goal is to replace wallets with iPhones.

Spotlight on Earnings

For some time now, Apple has been a value stock. We discussed this when we stated:

“While comparing to other popular value stocks like Walmart, Apple is trading at a slightly higher forward P/E ratio of 23 compared to Walmart’s 19. However, the company’s net profit margin of 25.71% is very good compared to Walmart’s 1.45%.

Similarly, Apple has an excellent free cash flow margin of 26.37% compared to Walmart's negative free cash flow margin of -5.15%. This helps illustrate why Apple’s stock has held up well as investors are able to participate in the most cash efficient company of all time while also participating in the company’s future innovation cycle.”

The most recent earnings results continue to prove that Apple’s management team is strong on efficiency. Despite revenue declining by (2.5%) YoY to $94.84B, the gross margin improved from 43.8% to 44.3% in the most recent quarter, up 50 basis points due to cost savings and a favorable mix from Services. The free cash flow margin remained solid at 27% compared to 26.4% in the same period last year. The board also authorized an additional $90 billion share repurchase and increased the quarterly dividend by 4% to $0.24 per share.

Source: COMPANY IR

Operating income declined by (5.5%) and net income declined by (3.4%) YoY to $24.2 billion. EPS of $1.52 remained unchanged from the same period last year, and notably, the company beat EPS estimates by 6.4%.

As stated, iPhone sales were up +1.5% to $51.3 billion. Mac revenue declined by (31%) YoY to $7.2 billion. This was due to a strong comp with M1 MacBooks sales from last year and a weaker consumer. iPad declined (13%) YoY to $6.7 billion. Wearables declined (0.6%) to $8.8 billion.

Services grew 5.5% YoY to $20.9 billion.

Paid subscriptions of 975 million, was up 18.2% YoY. This segment is important as there is a higher gross margin of 71% compared to 36.7% for products.

Management’s directional insights for the June quarter were soft with foreign exchange negatively impacting growth by about 4%. The company’s CFO, Luca Maestri, said in the earnings call, “We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points.”

Analysts expect revenue to decline by (1.1%) YoY to $82.03 billion.

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Where Can Apple Stock Go from Here?

There are two scenarios we are tracking for Apple based on the current price information:

The blue count suggests that we are in a long and drawn-out correction that will ultimately be targeting new lows. If Apple stays below $181.50 and then breaks below $150.50, the odds that this scenario is playing out will become very high. If this plays out, we will look towards the blue target box for a major low.

The red count suggests that the January low for Apple was a major one. This will put us in the final push in the large uptrend that began in 2009. If Apple can break above $181.50, we can see a final push to the upper red target box between $192 – $210.

Source: I/O Fund

Apple is currently under the major resistance zone between $176.25 – $181.50. Based on the relative weakness in most markets right now – small caps, industrials, materials, financials, transportation, the Dow Jones, as well as many global markets – we are expecting volatility to return sometime in early June. If Apple fails to punch through the $181.50 resistance before the market pulls back, it will need to hold the $160 – $150.50 range in order to allow for this final swing into the red target zone above. Below $150.50 and the top will be in for Apple, as the odds will greatly increase that we will be testing Apple’s January lows.

Conclusion:

My firm does not own Apple at the moment, yet given its enormous brand value and high install base, it’s a company we track closely. In addition, the company’s strong financials will only become more attractive in the event of a recession. For our purposes, my firm would want to see Services materialize as a leading Fintech play, and we would want to wait for the price action outlined above to play out before buying this stock.

The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund does not own shares in AAPL at the time of writing but may own other stocks pictured in the charts.

Royston Roche, I/O Fund Analyst, contributed to this article.

FAAMG Stocks Trading At Precarious Valuations

Posted on May 15, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 10, 2023,07:45am EDTForbes Forbes on May 10, 2023,07:45am EDT

The mega-cap stocks that are known as FAAMG reported earnings recently. These names are driving the market higher, especially Microsoft and Apple. In fact, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher.

The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we usually see at market tops.

Also worth noting, since the February top, we are seeing a strong rotation into Big Tech while aggressive selling is taking place in other areas of the market. Take a look at the market cap weighted NASDAQ-100, which has over40% weighting into the FAAMG stocks, compared to the equal weighted NASDAQ-100.

Source: I/O FUND

While the NASDAQ-100 has made a series of higher highs, led mostly by the FAAMG names, the equal weighted index has made a series of lower highs. We are seeing similar price action in small caps as well as most economically sensitive sectors. This is typically not the sign of a healthy market.

FAAMG Stocks Trading at Precarious Valuations

As you’ll see below, there’s little room in FAAMG valuations compared to their 5-year historic averages. Apple and Microsoft both trade above their 5-year median on the top line and bottom line whereas the others are getting quite close given the low growth rates and macro uncertainty. The only exception is Amazon.

Microsoft is leading on valuation at 10 compared to the FAAMGs that are at 7 or below. Most are within range of their five-year average valuation except Amazon at 2.0 today compared to an average valuation of 3.6.

Source: YCHARTS

Amazon has a P/E ratio of 247.79, compared to 32.96 for Microsoft, 29.22 for Meta, 28.13 for Apple, and 23.32 for Alphabet. The FAAMGs are trading within range of their historical valuation except for Amazon with a five-year average P/E ratio of 93.48.

Source: YCHARTS

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FAAMG Earnings Overview:

There were some puts and takes in the most recent earnings reports. Despite price telling us we could be nearing a top, there are some fundamental signs that FAAMG stocks may be overstretched in the near term.

Below, you’ll find that consensus points toward a bottom for FAAMG stocks yet it will require consensus materializing in the coming quarters in order for the stock price action to hold. In other words, the market has front run the rebound in growth and now we must wait and see if this rebound unfolds.

Alphabet: Search is Resilient

Alphabet’s revenue grew by 2.6% YoY or 6% in constant currency, for a total of $69.8 billion, primarily helped by the resilience in Search and the momentum in Cloud business. Although this is marginal growth, below you can see that Alphabet is expected to accelerate in revenue growth over the next few quarters from 2.6% to an expected 9.4% in Q1 of next year.

Source: SEEKING ALPHA

Operating margins were soft at 25% of revenue compared to 30% last year. Net income declined (8.4%) YoY to $15.1 billion. This resulted in EPS of $1.17 compared to $1.23 for the same period last year.

Source: YCHARTS

The drop in profits was mainly due to $2.6 billion in charges related to the reduction in the company’s workforce and office space, and was offset by $988 million in depreciation from servers and network equipment.

Google Cloud revenue grew by 28% YoY to $7.45 billion and reported its first profitable quarter bringing in $191 million operating income.

Microsoft: Top Line and Bottom Line Beat

Microsoft’s revenue grew 7.1% YoY and 10% in constant currency to $52.9 billion. Management’s revenue guidance for next quarter is $54.85 billion to $55.85 billion, representing YoY growth of 6.7% at the mid-point. Similar to Google, a noticeable acceleration is expected in the second half of the year.

Source: SEEKING ALPHA

Azure grew by 27% and 31% YoY in constant currency and came in at the higher end of management guidance of 30% to 31%.This is down from 38% growth in constant currency last quarter. Next quarter will also mark a deceleration with management guiding to 26.5% in constant currency. This includes 1% from AI services.

Source: I/O FUND

Operating income grew by 9.8% YoY to $22.35 billion. The net profit margin was 34.6% compared to 33.9% in the same period last year which resulted in EPS of $2.45 compared to $2.22 in the same period last year.

Source: YCHARTS

Meta: Back to Positive Growth

The company’s revenue grew by 2.6% YoY and 6% on constant currency to $28.6 billion. This is a positive as Meta’s revenue has declined YoY in the last three quarters.

Management’s revenue guidance for the next quarter is between $29.5 billion to $32 billion, representing a YoY growth of 6.7% at the mid-point. Analysts expect revenue to grow 7% YoY to $30.84 billion.

Source: SEEKING ALPHA

The operating income declined by (15%) YoY to $7.2 billion as total expenses rose 10% YoY. The operating margin was 25% compared to 31% in the same period last year. The net income declined by (24%) YoY to $5.7 billion, resulting in EPS of $2.20 compared to $2.72 in the same period last year.

Source: YCHARTS

The company recorded $1.14 billion in restructuring charges related to layoffs, facilities consolidation, and data center. Excluding these charges, the operating margin would be 4% higher and EPS would be $0.44 higher.

Amazon: AWS is Slowing

The company’s revenue grew by 9.4% and 11% YoY in constant currency to $127.4 billion. Analyst consensus is for growth of 8.2% next quarter.

Source: SEEKING ALPHA

The operating margin was 3.8% compared to 3.2% in the same period last year. Net Income was $3.2 billion or $0.31 per share compared to a net loss of ($3.8) billion or ($0.38) per share in the same period last year.

The net income included a pre-tax valuation loss of ($0.5) billion from the investment in Rivian Automobile compared to a pre-tax valuation loss of ($7.6) billion in the same period last year.

Source: YCHARTS

AWS revenue grew by 16% YoY to $21.4 billion. This is lower than the 20% growth in the December quarter and a remarkable slowdown from the 37% in the same period last year.

Management discussed in the earnings call that April AWS revenue growth further decelerated to 11%. This is due to the ongoing tough macro environment, causing customers to optimize their cloud spending in the recent quarter.

The company’s CEO, Andy Jassy, also highlighted cautiousness in the enterprise customers. “In AWS, what we’re seeing is enterprises continue to be cautious in their spending in this uncertain time. Customers are looking for ways to save money however they can right now. They tell us that most of it is cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”

Notably, despite the market rewarding Microsoft’s report, cost optimization is not isolated to one hyperscaler and investors can expect to see more evidence of optimizations in future reports.

Apple: More Buybacks to Appease the Street

Apple’s revenue declined by (2.5%) YoY to $94.84 billion. Management commented that they expect YoY performance to be similar to the March quarter. Analysts expect revenue to decline (1.7%) YoY to $81.53 billion in the next quarter following these comments.

Source: SEEKING ALPHA

iPhone sales grew by 1.5% YoY to $51.3 billion. Mac revenue declined by (31%) YoY to $7.2 billion. iPad revenue declined by (13%) YoY to $6.7 billion. Wearables, home and accessories revenue was flat, and the services segment revenue grew by 5.5% YoY to $20.9 billion.

The operating margin was 29.9% compared to 30.8% in the same period last year. The operating expenses of $13.66 billion were lower than management guidance of $13.7 billion to $13.9 billion, which the market saw as a positive.

Net income declined by (3.4%) YoY to $24.2 billion with a net profit margin of 25.5% compared to 25.7% in the same period last year. EPS came in at $1.52 and remained unchanged from the same period last year.

Source: YCHARTS

Apple returned $23 billion to the shareholders through dividends and equivalents of $3.7 billion and $19.1 billion in share repurchases. The board also authorized an additional $90 billion share repurchase and increased the quarterly dividend by 4% to $0.24 per share.

Analyst Comments:

Deutsche Bank analyst Benjamin Black raised the firm's price target on Alphabet to $125 from $120 and kept a Buy rating on the shares. He noted, “The company reported solid Q1 results with the biggest takeaway being the stabilizing growth trends at Search and YouTube, which beat Street expectations.”stabilizing growth trends at Search and YouTube, which beat Street expectations.”

Wedbush Securities analyst Dan Ives said in a research note. "It's clear that in Redmond's enterprise backyard the company is gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft,"gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft," He further said, "Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."

BMO analyst Keith Bachman upgraded Microsoft (MSFT) shares to outperform. He stated that he now has "higher conviction" that any headwinds to Azure are likely to moderate by the end of the year, while opportunities in artificial intelligence can help the longer-term. "While the stock is not inexpensive, we think the durable growth opportunities warrant a premium valuation."

RBC Capital analyst Brad Erickson raised the firm's price target on Meta Platforms to $285 from $225 and kept an Outperform rating on the shares. Brad said, “The company's Q1 results were better-than-feared and the simple three-fold bull case – dominating engagement vs. competition, restoring lost signal post-IDFA, and cutting costs – is increasingly coming into view.” RBC believes that further upside is still achievable for Meta on engagement share gains and the ongoing conversion improvement eventually leading to incremental spend.

Citi analyst Ronald Josey raised the firm's price target on Meta Platforms to $315 from $260 and kept a Buy rating on the shares. “With engagement rising, newer advertising products attracting incremental spend, and a more streamlined organization, Meta's momentum in Q1 can continue.”“With engagement rising, newer advertising products attracting incremental spend, and a more streamlined organization, Meta's momentum in Q1 can continue.” the analyst tells investors in a research note.

Conclusion:

We have Buy levels we are targeting for FAAMG stocks, which we share with our premium research members each week as the stocks progress. We believe our target buy levels will set us up for gains in FAAMG stocks when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

Right now, we do not believe FAAMG stocks are in a buy zone. Instead, some are trading higher than their 5-year median on valuations despite a weaker macro backdrop and fundamental weakness. The market is front-running the anticipated revenue rebound. Most of this rebound is based off low comps, and there could be soft growth in the future for some of these names.

You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Equity Analyst Royston Roche contributed to this article.

Apple’s Stock In Focus: More Profitable Than Banks

Posted on May 4, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 1, 2023,10:07pm EDTForbes Forbes on May 1, 2023,10:07pm EDT

Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.

The markets have clearly shifted from favoring top line growth to emphasizing bottom line strength. This reminder is echoed across every industry, but none more so than the finance industry where regional banks are defaulting due to high bond rates and depositor withdrawals.

It’s easy to dismiss the financial sector in today’s tech focused market. After all, financials only account for 11% of the total market cap of the S&P 500, with 3 sectors ahead of it. However, all companies depend on loans, and when banks get scared, the credit window shuts, which tends to lead to outsized bankruptcies. Simply put, banks cause the worst kinds of recessions. We detailed this more here.

Today, the tech industry has disrupted nearly every industry in its path from energy, to commerce, to automotive, to entertainment. Perhaps now is the time that tech will finally disrupt the banking sector.

Apple Is More Profitable Than Banks

JP Morgan has over $1.4 trillion on its balance sheet compared to Apple’s $165 billion. However, Apple is more profitable with $99 billion in profit last year, which is higher than JP Morgan and Citi combined. What Apple has to boot is access to 1.2 billion iPhone users. Therefore Apple may not have as much cash as a bank, but it’s fundamentally a more investable business model.

For stock investors, Apple’s large cash reserves are certainly not news as the company has more cash than any other tech stock. What’s news is that the FED is aggressively draining liquidity from the system as a means to fight inflation, as shown in the chart below, that compares the trends in liquidity to the S&P 500.

Source: I/O FUND

There has been a long-standing relationship to liquidity and asset prices, and until we can see a new liquidity cycle start, companies with cash will have better leverage over those that don’t. You can also expect volatility in the markets to remain high until there’s a new liquidity cycle, which we covered when we discussed where we hold cash.

The longer this plays out, the more ways Apple can leverage its $165 billion in cash as consumers will seek better financing terms, higher yields and credit lines will also increase.

For example, Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

Apple has the best operating margin among the FAANG stocks at 30.7%. Net profit last quarter was $30 billion with free cash flow of also $30 billion.

Source: I/O FUND

Apple is not immune to the effects felt across corporate bonds and mortgage securities. According to CNBC, the company has $13 billion in unrealized losses. These losses are not reported as long as Apple plans to hold to maturity, and as long as the bond issuers are solvent enough to repay the debt. Also, a loss of $13 billion is not detrimental to Apple, as the company generates $100 billion in free cash flow per year. Notably, the company used to have $250 billion in cash reserves before increasing buybacks in 2017.

Apple has debt of $111 billion for a net cash balance of $54 billion. The company paid $3.8 billion in dividends and equivalents and repurchased shares worth $19.5 billion.

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What to Watch for in Q1 Earnings

Apple is not a growth stock. The company is known for strong margins, outsized cash flows, and stable balance sheet. The company’s revenue has been partly negatively impacted from the adverse FX movements. Analysts expect revenue to decline by (4.6%) YoY to $92.81 billion yet the company’s revenue is expected to grow after the June quarter.

Source: SEEKING ALPHA

On a fiscal year basis, Apple is expected to report a rebound next fiscal year:

Source: SEEKING ALPHA

Apple has the highest operating margins among the FAANG stocks. For EPS, Apple is expected to report the following:

Source: YCHARTS

Apple’s main segments are iPhones, Macs, iPads, Wearables and Services. Of these, the Mac segment is dragging on Apple’s results. Last quarter, Mac sales declined by (29%) YoY to $7.7 billion. Management expects revenue to decline double digits due to challenging comparable with the M1 Mac Books from last year and a weaker consumer.

According to IDC, there was a YoY decline of (29%) in the shipments of traditional PCs in Q1 2023 due to weaker demand and excess inventory. The report from IDC suggests that Macs declined by (40%) in Q1 2023.

iPhone sales in the December quarter declined by (8%) YoY to $65.8 billion yet were flat excluding foreign exchange rates. Management expects revenue to accelerate in the March quarter when compared to the Dec quarter, per the earnings call: “For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance.”

According to the research firm Canalys, the global smartphone market declined by (13%) YoY in Q1 2023. The report from Canalys states that Apple gained 3% in global market share from 18% to 21% driven by the demand for iPhone 14 Pro series. Samsung was the only leading vendor to report QoQ growth and also regained the #1 position at 22% market share.

The Services segment is the second largest segment after iPhone. This is where payment services and loan products will show up. Many investors see this as the long-term opportunity as Apple is monetizing it’s installed base of over 2 billion active devices. The installed base grew by 8% YoY. Services revenue grew 6% YoY to $20.8 billion and grew double digits excluding foreign exchange rates.

The company has more than 935 million paid subscriptions, up 19% YoY. Per CFO, Luca Maestri, The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”

Big Tech is Propping up the Nasdaq

In the early phase of a bull market, we tend to see expansive buying amongst most sectors and markets, with a relative focus in your economically sensitive sectors like small caps and high beta names. This is simply not the case right now. In fact, what we are seeing is a handful of big tech names propping up the markets. Meanwhile, underneath this, economically sensitive stocks are getting aggressively sold while Big Tech props up the market.

Source: I/O FUND

Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher. The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we see at market tops.

Regarding Apple’s price chart, we believe that the bounce off the October 13th low in 2022 is starting to top out.

I/O FUND

We have been talking about the $169-$170 price target for many months in our premium service. Now that we are here, you can see how the market is trying to push higher on weaker volume and weaker momentum. We could see a push to the $175 region in this final push higher, but soon, AAPL will have to correct. If the structure of this correction is a 5 wave decline, then we will be targeting new lows. On the other hand, if this pullback is a 3 wave move, we could see a move back to the $145 region only, before a fresh attempt higher is made.

Note on Valuation:

Apple is trading at a premium with a current PE ratio of 28. The stock does not tend to hold well at a PE ratio of 30.

Source: I/O FUND

The forward PE Ratio of 28 is also stretched and does not hold well at this level historically.

Source: I/O FUND

Conclusion:

Apple is the most likely candidate to disrupt the financial sector. The company’s reach of 2 billion devices has assisted its slow roll-out of payment services with 75% of iPhone users opting into Apple Pay. One can only imagine the potential success Apple may have in leveraging its cash for higher yields during a time when banks are weak in reputation and balance sheets.

In the upcoming earnings report, expect weakness in Macs to overshadow the other segments. iPhones are expected to be flat yet the Services segment is where fintech growth will show up. Overall, this is unlikely to be a standout quarter for Apple on the top line, so look for surprises on the bottom line to drive the stock.

We have Buy levels we are targeting for Apple, which we share with our premium research members each week as the stock progresses. We believe our target buy level will set us up for gains in Apple’s stock when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

We also issue real-time trade alerts when we enter and exit stocks. YTD, our firm has held the two top performing assets in the tech industry – Nvidia and Bitcoin — at high allocations. We also issued a buy alert with NVDA last year at $108 and with Bitcoin in the $16,000 region, based on the type of analysis we provide. You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Portfolio Manager Knox Ridley and Equity Analyst Royston Roche contributed to this article.

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.

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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 Stock: What You Need To Know About Q1 Earnings

Posted on April 16, 2023June 30, 2026 by io-fund

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

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

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

Rather than Investor Day, what is more important for Tesla are two key data points in the upcoming earnings report. In February, our firm stated:

“The stakes are high for Tesla because if the margins remain healthy, the stock will do quite well. However, if the margins contract, then the bears will be in control. This is a big moment for Tesla, as high average sales price has been a contentious issue for meeting its addressable market. Wall Street will want to see it's possible to do both —- serve a wider total addressable market (TAM) with more affordable prices while maintaining a healthy bottom line.”

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

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Production target:

Tesla has a production target of 1.8m car units in 2023 and average of 450,000 per quarter. On April 3, 2023, Tesla released their q123 production and deliveries. Although the 440,808 units is slightly below the quarterly average, it was in line with market expectations and on track to meet 2023 goal.

Source: I/O FUND

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

Impact of price cuts on overall ASP:

After announcing price cuts in January, Tesla announced price reductions before the Easter holiday. The April reductions were smaller than the January ones that were implemented so that certain models would qualify for the EV car tax credit. The April reductions were as follows

Model 3 by $1,000
Model Y by $2,000
Model S & Y range from between $5,000 to $10,000

Models 3 and Y comprise the vast majority of overall production. After the announced price reductions, this is the estimated starting price levels as of 4/10/23 by cars.com.

Source: CARS.COMCARS.COM

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

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

Automotive Gross Margins

Automotive gross margins will be the key focus for the earnings call. There are two different metrics. Automotive gross margins, excluding leases and credits, and reported Automotive gross margins that are released with earnings. The former ended q422 at about 18% and is typically discussed during the earnings question and answer. It is the margin we will focus on. Any improvement will be reflected in the reported Automotive gross margins which ended q422 at 25.9%.

The key to Automotive gross margins, excluding leases and credits, are ASPS and COGS per vehicle. In the q422 conference call this is how Tesla guided future automotive gross margins. They stated ASPS will be above $47k and automotive margins above 20%.

Question

“The next question from investors is, after recent price cuts, analyst released expectations that Tesla automotive gross margin, excluding leasing and credits, will drop below 20% and average selling price around $47,000 across all models. Where do you see average selling price and gross margins after the price cuts?Tesla automotive gross margin, excluding leasing and credits, will drop below 20% and average selling price around $47,000 across all models. Where do you see average selling price and gross margins after the price cuts?

Zachary Kirkhorn, CFO

So there is certainly a lot of uncertainty about how the year will unfold, but I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.

There was a follow-up if cogs could go back down to $36,000. This exchange provided further insight.

Excellent. Zach, actually, I'd like to follow up on the data point you just gave on cost. If I look back at the COGS per car, you guys bottom close to $36,000 in the middle of 2021. And then the number went up as you had to face with inflation in input costs and the ramp of Berlin and Texas. And this quarter, I think we are close to $40,000 and we peaked maybe close to $42,000 at some point last year.

Based on this information, we put together a simple sensitivity analysis between average ASPs and COGs to determine a range of potential automotive gross margins. We estimate that margins ended q422 at 18% (yellow). Tesla has guided for ASPs greater than $47,000 and margins of greater than 20% (orange highlights). In our prior analysis, we assumed that COGs per car would remain at $40k and that higher ASP would result in margins above 20%. For example, an ASP of $48k and $49K result in 20% and 23% margins with COGS steady at $40k.

Source: I/O FUND

However, given the recent weakness in Lithium and Aluminum after the q4 call. There is the potential that Tesla’s margins may benefit even if ASPs remain at $47k. For example, if ASPS remain at 47k and COG go down to $39k and $38k, margins improve to 21% and 24%, respectively. For reference, the recent low in COGS was $36k. Given timing differences, this COGS improvement may not be seen until after Q1. If it’s not seen in Q1, to the extent Tesla discusses the potential lower COGS benefit on automotive margins, the stock will react positively.

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

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

From a technical perspective, Tesla has bottomed out post Investor Day. It appears to be setting up for a fresh high before seeing a bigger pullback on the horizon. Tesla is trading in line with tech equites, so it can be affected by deteriorating macro forces, if this happens, we could see $92 as the next likely target for a major low. As long as we hold $137, this scenario can be avoided.

We could see one more swing high into late April. We do not see this as a buying opportunity. The $231-$235 region will be very strong resistance, which will occur on lower momentum. If this happens, we will look for the following pullback to add.

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

Source: I/O FUND

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.

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.

Timeout for Tesla Stock: Where We Plan to Buy

Posted on February 22, 2023June 30, 2026 by io-fund

On 1/26/23, we sent out a trade alert notifying our readers that we purchased shares of TSLA after the release of its 1/25/23 Q422 earnings release. Based on the 2/17/23 closing price of $208.31, TSLA is up 31%. Since that Q4 report, we thought it be worthwhile to update our readers on our thoughts both fundamentally and technically on what we’re watching for in the upcoming weeks.

Right now, our technical analysis is at odds with our fundamental analysis, which is often good news, as it means we will be afforded a lower entry on a stock position we plan to build.

The technicals are telling us a lower entry is on the horizon. However, what will make or break Tesla stock in 2023 is the margins. As most Tesla investors are aware, the company has lowered its price on its vehicles. Coupled with the $7500 EV credit, Tesla's vehicles are more affordable in Q1 than ever before, with some price points below $50,000 for the Model Y SUV when combining the price cut with the EV Credit.

This has led to Model Y selling out in Q1, per a Reuters report on February 15th. Considering a Model Y is now priced at $52,990, down from $65,900, this means a 30% price reduction is possible with the additional $7500 EV credit with the total cost of $45,490.

With these incentives, most investors can see a path to Tesla meeting its delivery goal this year, however, the impending issue is if Tesla can do so while maintaining healthy margins.

The stakes are high for Tesla's stock 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.

Our in-depth analysis below discusses why the I/O Fund Analyst Team is forecasting that the margins will, indeed, overcome a lower average sales price to sustain operating leverage. Once we discuss the margins in-depth, which to reiterate, we believe is the most important piece to Tesla's 2023 story, we then go into how we plan to build this position while respecting the fact the broad market is in the driver's seat for growth stocks.

Tesla Stock: What to Look for in 2023

First, let’s take a quick look at Tesla through a few graphs. If you were presented with the following company, would you find this an attractive business?

A company with steadily increasing operating margins vastly superior to its competitors and greater that those in the S&P 500.

Source: Tesla Q422 investor presentation

With historical y/y revenue growth also exceeding its peers due to strong demand for its product.

Source: Tesla Q422 investor presentation

With a significant market share gain opportunity for its products

Source: Tesla Q422 investor presentation

It’s these attributes that have drawn us to Tesla as an attractive business. However, as investors in the equity, there are several key factors we are monitoring that may drive the stock.

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Profitability: Gross margins (GM) vs Operating profit margins (OPM)

Both are impacted by different variables. For GM, the main drivers are the ASPs Tesla charges for their cars and number of cars sold less costs of goods sold such as raw materials costs, particularly lithium used in batteries. For reference, here's the 5-yr price chart of lithium ($/kg). Tesla does not break out this cost but they did refer to lithium battery demand as "quasi-infinite" and a "significant cost." It won't impact their production targets but it continues to be an unpredictable cost headwind. It also explains while there has been renewed speculation that Tesla is interested in purchasing lithium mining assets.

Source: Dailymetalprice.com

For OPM, it’s mainly related to R&D and factory ramp-up costs. Here’s a snapshot (2017 – 2022) of Tesla’s ASPs in relation to its GAAP operating margins. It’s grown from negative 14% to almost positive 17%.

Source: Tesla Q422 investor presentation

The chart above demonstrates that while ASPs have come down about 40% from a little over $100k to $47k, OPM has expanded. A reflection of the immense impact manufacturing efficiency has on operating leverage from higher utilization as the number of cars produced and sold increased.

In the most recent Q4 call, Tesla discussed how their future focus would be on increasing operating margins over time. A sign of the evolution of its mindset from that of a technology company needing to invest and sacrifice short term profitability to one with a large industrials-like manufacturing footprint and supply chain focusing on costs and efficiencies. A focus that long-term investors should find appealing.

Perhaps a simple picture provides insight on how Tesla thinks about manufacturing efficiencies versus its peers. If you compare the Q422 investor presentation of Tesla to GM and Ford. There's not one picture of a human. Rather, you see high precision Kuka German robots. There's not a single robot in GM or Ford's presentation. Tesla's Q4 opm were 16% compared to GM at 8.8% (adj) and Ford at 5.8% (adj).

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

That said, at the moment, the investment community is understandably focusing on the automotive gross margins given the recent price reductions A positive takeaway from the call was that Tesla expects ASPs to stay above $47,000 and automotive gross margin to go above 20%. Indications that automotive gross margins have bottomed. This message contributed to the stock rally (emphasis added below).

Zachary Kirkhorn, CFO:Zachary Kirkhorn, CFO:

So there is certainly a lot of uncertainty about how the year will unfold, but I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models.

An analyst pointed out that the avg COGS per car has gone from $36,000 in mid-2021, peaking at $42,000 back to almost $40,000 currently. Estimates that management did not refute. So a very simple back of the envelope calculation comes to about 18% auto gross margins currently ($(47,000-40,000)/($40,000)). The key takeaway is that pricing and costs efficiencies will both have an impact in getting margins above 20%. For example, using the prior calculation just a $1000 increase in ASPs or $1000 decrease in COGS alone will lead to 20% auto gross margin. If both happen at the same time, that's about a 23% auto gross margin.

There was a follow-up if COGS could go back down to $36,000. This exchange provided further insight.

Zachary Kirkhorn, CFOZachary Kirkhorn, CFO

The Austin and Berlin ramp inefficiencies in 4680 will make a substantial amount of progress on that over the course of the year, and that's within Tesla's control. We're doing a lot of work on cost reduction outside of that. And we talked about supply chain costs, expedite, logistics, attacking everything.

Furthermore, to the extent the Fed’s actions have lowered non-lithium prices, there will be a lag.

Roshan Thomas, VP of Supply Chain, added the following.

Below, is a simple sensitivity analysis of the impact that changes in asp and cogs per car have on automotive gross margin per car. It excludes leasing and credits. The numbers are estimates only and the primary purpose is to illustrate the magnitude these changes have on automotive gross margins. The yellow highlight is where they are estimated to be currently, blue is the minimum level Tesla has guided, green is potential upside depending on the change only in price or cogs and gray is if both change. At the moment, a change in price will likely be the main driver in automotive gross margin improvement. So, an increase in asp to 49k or 50k results in an automotive gross of 23% and 25%, respectively.

Gross Margins and Operating Margins for 2023

We outlined the variables that impact both. We will look for continued signs of stabilization in the Q123 report and further confirmation that we have seen the bottom in both.

In Q122, Tesla reported operating margins of 19.2% and ended Q422 with 16%. For 2022 it was 16.8% vs. 12.1% in 2021. If the operating margin stabilizes at a level similar to or greater than Q4, then a recovery in 2H23 is reasonable, if not sooner in Q2.

Tesla will have an investor's day on March 1st, this may provide further insight.

Long-term OPM Potential:

Tesla has not provided any medium to long-term OPM targets, but if they did, this would lead to a re-rating of the stock. The auto industry is still cyclical so that may be wishful thinking. At the moment, Tesla's OPM dwarfs its auto competition. Perhaps, we are getting closer to the point where the best comp will be other industrial companies with best in-class margins. A topic we will look at in the future.

This is what Musk had to say.

“As we mentioned many times before, we want to be the best manufacturer. But really, manufacturing technology will be our most important long-term strength. And we'll talk more about our upcoming plans at the March 1st Investor Day.”

For a point of reference, Mercedes Benz and BMW have about 13% group operating margins while Ferrari has 23%. Of course, they have different product mixes, price points and client bases but they are useful comparables to parameterize the margin potential.

In Q122, Tesla reported 19.2% operating margins. So, is a medium-term 20%+ operating margin realistic?

Another potential source of upside to margins is if Tesla acquires a lithium mining asset so that they will have better control over their lithium input costs.

Earnings Outlook

Fundamentally, analysts have reduced their adjusted 2023 EPS estimates to $3.97, compared to 2022 $4.07 EPS (actual) mainly due to a decrease in Q1 estimates. Reflecting management's guidance of operating margins similar to q422 due to recent pricing initiatives and raw materials costs but then stabilization and improvement over the course of the year. Upside to these estimates will likely come from higher ASP assumptions.

The Current Demand Outlook

One factor that contributed to the stock rally was management's comments that January orders were 2x that of production (emphasis added).

The most common question we've been getting from investors is about demand. Thus far — so I want to put that concern to rest. Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So it’s hard to say that will continue twice the rate of production, but the orders are high. And we've actually raised the Model Y price a little bit in response to that.”Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So it’s hard to say that will continue twice the rate of production, but the orders are high. And we've actually raised the Model Y price a little bit in response to that.”

There are signs that demand has remained strong and that the combination of Tesla price cuts and changes to incentives from the U.S. government have been positive for demand. According to Electrek, the Model Y is sold out for Q1. There are no more production slots for a Y order in Q1. Estimated delivery now is April to June. Model Y levels are estimated to be low.

Demand indicators that are supportive of higher pricing and moving automotive gross margin above 20%. Recall, that a $1000 asp increase alone will get to 20%.

Source: Tesla Inventory Charts

Cash flow

We had recently written that the decline in FCF, mainly due to an inventory build in Q4, was worth monitoring. From Q2 of last year to Q3 to Q4, it increased from 4 to 8 to 13 days of inventory. Although higher, these levels are much lower than peers. According to Statista, as of 2022 one of the highest was Dodge at 64 days. Ford had 41, GMC at 38, Hyundai at 37, BMW at 27, Toyota at 21 and Kia at 18.5 days. Here's a snapshot on how Tesla compares to its peers.

A glass half-full perspective would be that Tesla's lower inventory vs its peers is a product of their leading manufacturing capabilities. And that the recent inventory "build" (relative to its historic levels) was a reflection of their effective inventory management and anticipation of future demand in 2023.

Given the recent demand trends, we are less concerned and will check inventory levels at the end of Q1. These initial concerns were tempered by the large $20b cash balance that would allow Tesla to execute necessary investments if cash flow was tied up in inventory.

One factor that impacted Q4 cash flow that we are still looking into is the $4.4b spent on investments. Given the recent lithium asset acquisition speculation, could they be related?

More on FSD:

From a gross margin perspective, this is how Elon described (emphasis added) the impact of a customer paying for the FSD software.

Elon Musk

Yes. Something that I think some of these smart retail investors understand, but I think a lot of others maybe don't is that the — every time we sell a car, it has the ability, just from uploading software to have full self-driving enabled and full self-driving is obviously getting better very rapidly.

So that's actually a tremendous upside potential because all of those cars, with a few exceptions — I mean, only a small percentage of cars don't have Hardware 3. So that means that there's millions of cars were full self-driving can be sold at essentially 100% gross margin. And the value of it grows as the autonomous capability grows. And then when it becomes fully autonomous, that is a value increase in the fleet. That might be the biggest asset value increase of anything in history. Yeah. So that means that there's millions of cars were full self-driving can be sold at essentially 100% gross margin. And the value of it grows as the autonomous capability grows. And then when it becomes fully autonomous, that is a value increase in the fleet. That might be the biggest asset value increase of anything in history. Yeah

But it’s still a work in progress

There was recent headlines on 2/17/23 regarding concerns over the software. Tesla recalled about 300k cars and will update the software. The stock finished up over 3% for the day so the market does not seem to be concerned. But we will monitor it.

Conclusion

The recent data points have given us reasons to give more credence to Tesla’s Q4 constructive commentary around auto gross margins and company operating margins for 2023.

The next catalyst will be the March Investor Day.

Things we will be updating our premium members at I/O Fund on:

Further evidence of a stabilization in automotive gross margins and group operating margins
Demand vs. production trends through January and February
Pricing trends
Manufacturing initiatives to increase cost inefficiencies
Efforts to secure lithium assets
Recent FSD concerns

How to position now and going into Tesla’s Investor’s Day on March 1st

The 2022 bear market appears to be a large degree correction within an even larger uptrend. Like some FAANGs, this implies that when the current macro cycle ends, and a new growth cycles begins, it has a probable chance of making new all-time highs. This cannot be said about all tech.

The question the next few weeks will answer is: Has TSLA bottomed at $102, or Does TSLA have one more low around $92 before bottoming?

If we look at the structure of the 2022 decline, it appears to be incomplete. In other words, the final drop only has 4 waves in place, and implies a 5th wave drop is soon to follow. Considering that strength of Tesla's recent earnings report, this decline, if it were to unfold, would be the result of a continuation of macro forces. This cannot be ruled out.

The below chart has two scenarios to address, one of which outlines this possibility. The blue count implies that TSLA bottomed at $102 and will need to make a higher low in the coming weeks/months that holds $138 and turns back up. The red scenario breaks below $138, and continues to make a slight new low into the $92 region, which would complete the large degree drawdown off the 2022 high.

In the above chart, you can see how the weekly momentum indicator is making a higher high while price makes a lower high. This is typically bearish, and a warning to anyone looking to buy TSLA at these levels.

If we zoom-in on the bounce, we have a what appears to be a bullish structure. Note the gap in the middle of the uptrend on heavy volume. This gap stayed open, and price continued higher. These gaps tend to occur in the middle of the move, which has proven to play out. We are now in the final moves of this bounce as momentum and volume continues to fade at these price levels.

If our blue scenario is in play, the coming pullback needs to hold $138. If we break below $138, the odds start to shift that the scenario in red is in play. Regardless of what plays out, we believe Tesla, Inc. is about to set up a great buying opportunity for years to come.

We issue real-time trade alerts to our research members when we enter, exit, add or trim to a stock. Our portfolio is actively managed with allocations that correlate to a stock's current technical strength or weakness, as well as the underlying fundamentals.

What's next

This Thursday at 4:30 pm Eastern, I will be holding a webinar for premium I/O Fund members to discuss how I plan to navigate the broad market, as well as various tech entries including Tesla. We offer trade alerts plus an automated hedging signal. In addition, we are holding an annual webinar on March 14th that discusses "How to Build a Defensible Tech Portfolio" Follow me on Seeking Alpha for more details.

The I/O Fund Analyst Team contributed to this article

Tesla Q4 Earnings: Solid ER and Valuation is Low

Posted on January 27, 2023June 30, 2026 by io-fund

Given there will be very few perfect earnings reports in the coming weeks, the new macro will force investors to subjectively determine what is a good report and what is not a good report. Before we go into the pros and cons of the report, I want to say that Tesla’s low valuation is a primary reason we entered the stock coupled with a strong earnings report. We covered this yesterday in our notification blog:

“Tesla is trading quite low and has not traded this low since “the new macro.” The forward P/S is at 4.7 and the forward P/E is at 36.15. If you take the tumultuous market of 2022 as a comp, Tesla may have 20% and up to 100% room. For the best case scenario to happen, we need broad market participation.”

It was not a perfect earnings report – but the point is the stock is not priced for perfection. I think there’s a disconnect basically between the company’s fundamentals and the current stock price (barring any unforeseen black swan macro event).

The pros are the roughly 30% forward growth rate, no debt, $20 billion in cash on the balance sheet and an expanding operating margin (YoY) and expanding net margin (YoY). The catalyst is the lower prices that allow Tesla’s Model 3 to be included in the $7,500 EV credit. What was a $50K vehicle has now become a $40K vehicle with Tesla only eating $3K of the price as they’ve priced the vehicle at $47K to clear the $50K limitation on the EV credit. We covered this a few months back here.

Here is what the CFO said: “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.”

The price cuts are between 7% to 20%. For example, a Model Y was originally $65,990 and will now be $52,990. Then, you add the $7500 EV credit and you get about $20K off the price of the smaller SUV.

An additional catalyst for Tesla stock is the manufacturing credits for battery cell packs, that were stated to be $3,700 per Model 3 and Model Y. Tesla’s manufacturing is partly overseas and the credit is only for domestic manufacturing. The CFO stated to expect this: “But we think on the order of $150 million to $250 million per quarter this year and growing over the course of the year as our volumes grow.”

Note: We discussed the credits Enphase was expecting on their microinverters here.microinverters here.

The cons are the free cash flow was down 50% this quarter to $1.4B and the gross margin is a bit softer. Notably, free cash flow increased 50% for FY2022 but it’s certainly something to watch as it’s partly due to higher inventories. However, given the zero debt and $20B in cash (Tesla makes substantial interest on this cash), the company has time on their side to recover the FCF margin. In other words, to beat Tesla up over this while it’s far and above the better auto OEM on the bottom line, is perhaps lacking perspective. With that said, it’s earmarked as the number one thing to watch moving forward.

Financials:

Given the recent headlines, expectations going into Tesla’s 4th quarter earnings were fairly low. On an adjusted basis, Tesla reported an EPS of $1.19 eps vs consensus of $1.11. With that important hurdle cleared, Tesla’s 2023 outlook was in focus. In a market where companies have been providing dour outlooks based on the macro, there were enough positives to cause us to look closely at valuation.

2023 Production of around 1.8m vehicles, in line with Tesla’s 50% long-term CAGR goal
$20b in cash will allow it to execute its expansion plans during uncertain macro environment
Although operating margins were down q/q and may stay at these levels in the short term, management stated that the longer-term trajectory was higher as the benefits of greater operating leverage take effect. Even at current levels, Tesla’s current operating margins are 2-3x more than traditional OEMs.

Revenue came in at 37% growth for $24.03 billion total. Automotive growth was 33% for $21.3 billion in revenue. There were regulatory credits of $467 million.

The FY2022 revenue came in at 51% for revenue of $81.5 billion. Automotive also came in at 51% for revenue of $71.462 billion. There were $177 million in regulatory credits.

The company reported EPS of $1.19 in Q4 compared to EPS of $1.05 in the third quarter. The FY2022 adjusted EPS was $4.07. The EPS for next quarter is expected to be $0.87 which is lower than the EPS of $1.07 in the year ago quarter.

It’s true that Tesla’s gross margin was soft at 23.80% with an automotive gross margin of 25.9%. This is 150 bps lower and 200 bps lower, respectively, than the September quarter.

It’s also true operating margin of 16% was weaker by 119 bps from the September quarter of 17.19%. However, it was higher than the June quarter at 15% and higher than the year ago quarter at 14.75%. I would consider this strong with anything below 14% to 15% would be contracting. But, this is where an earnings report becomes subjective – and why a lower valuation is helpful especially if a company is not priced for perfection, and rather, is priced for low expectations.

The adjusted EBITDA margin of 22.2% is on the low side for Tesla in FY2022 as the previous quarter was 23.2% and the year ago quarter was 23.1%. My opinion is that it’s not an egregious contraction (especially having a large cash position) and is noted as something to watch.

The net margin was higher than the September quarter at 16.8% compared to 15.30%. This was also higher than the year ago quarter at 13.10%.

The operating cash flow and free cash flow is where the concern is with this particular earnings report. Operating cash flow of $3.27B was down from $4.58B in the year ago quarter. The Free Cash flow of $1.4B was down 49% YoY compared to $2.775B in the year ago quarter. Both were down sequentially as well with the September quarter reporting Op Cash Flow of $5.1B and FCF of $3.29B.

Looking closer, there were two line items weighing on cash flow:

· Change in operating assets and liabilities at ($2.191) billion

· Purchases of Investments ($4.368)

The change in operating assets and liabilities points toward an increase in inventories and account receivables. Where the bears may have a good point to consider is the inventory supply has been steadily increasing since Q32022. This is reflected in the $2.191B.

Where the bulls may win, is that the typical response to increased inventory is to lower prices. Not only is Tesla going to do this (with the idea it will increase selling volume) but is assisted in doing so with the $7500.

As long as current stockholders understand that this is where the speculations remains – will the lower prices help to lower global inventory and days of supply, and meanwhile, can the management keep operating margin steady while doing so?and meanwhile, can the management keep operating margin steady while doing so?

For the purchase of investments of $4.36B, we may need the 10-Q as there weren’t questions on the call from the sell-side analysts to know exactly what this refers to.

Earnings Call:

Management has stated that operating margin is what to watch:

“The second comment I wanted to make here is that as a management team here, we're most focused on what our operating margin is. And so as other areas of the business become more important, particularly the energy business, which is growing faster than the vehicle business and as we're heavily focused on operating leverage here, improving efficiency of our overheads, we think the right metric for us to be focused on is operating margin.”

Short sellers will certainly ignore this comment, and it’s up to each investor if a consistent operating margin is enough to overlook the FCF this past quarter and the softer gross margin.

The comment that has ruffled some feathers is this from Elon Musk:

“The most common question we've been getting from investors is about demand. Thus far — so I want to put that concern to rest. Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So it’s hard to say that will continue twice the rate of production, but the orders are high. And we've actually raised the Model Y price a little bit in response to that.”

The first question on the call questioned if this statement was true or not:

Martin Viecha (moderator)

Thank you very much, Zach. Let's now go to investor questions. The first question is, some analysts are claiming that Tesla orders, net of cancellations, came in at a rate less than half of production in the fourth quarter. This has raised demand concerns. Can you elaborate on order trends so far this year and how they compare to current production rates? I think…

Elon Musk

We already answered that question.

Martin Viecha

Yes, exactly.

Elon Musk

Demand far exceeds production, and we actually are making some small price increases as a result.”

My take: I think they’re talking about two different things here. The question is asking about Q4 and Elon Musk is talking about January. With Q4 behind us, the January comment is more important but there's no evidence to back it yet.

Notably, orders won’t move stock price, rather it will be if Tesla can meet the guide of 1.8M on production, for the 28.8% growth. It was mentioned on the call that Tesla can produce 2M this year barring any unforeseen “force majeure” such as an earthquake or a tsunami.

Secondly, and perhaps most importantly, deliveries are what will also move the price. However, if we assume the January comment is accurate, then production will be equally important this year to meet the demand.

Regarding the operating margin, the company is taking cost reduction efforts. However, the company did state there would be an impact to operating margin in the near term that will level out over the year.

“Second, on cost reduction, we're holding steady on our plans to rapidly increase volume, while improving overhead efficiency, which is the most effective method to retain strength in our operating margins.

In particular, we're accelerating improvements in our new factories in Austin, Berlin and in-house cells, where efficiencies are the highest. But we are attacking every other area of cost and unwinding cost increases created for multiple years of COVID-related instability. This includes logistics, expedites, accumulation of material buffers, part premiums, productivity and overheads as an example […] In that, we've priced our products with a view towards a longer-term cost structure. Thus, there will be an impact on operating margin in the near term. However, we believe our margins will remain healthy and industry-leading over the course of the year.”

It's also important to note that deflationary pressures on Tesla’s supply chain will help the operating margin. The issue that is riling up the bearish thesis is that by cutting prices to $47,000 while the cost of goods (COGS) is at $42,000 will very little margin. Tesla’s answer to this is that COGS should go down as $42K is the peak, and $36K is the bottom, so somewhere in the middle is where it will land this year.

The company is working to optimize the supply chain and to also optimize the vehicle design, such as the powertrain.

Here is what was said on the call:

“And we're gathering a lot of data out of that fleet to understand how we can sort of bring some margin that we didn't know we had out of the product. So, over the course of 2023 on the powertrain side, we're actually going to go after sort of some materials where we're paying for more performance than we need, or we have more content than we need, without impacting reliability at all.”

Valuation:

If I were to choose one thing to talk about with Tesla stock (in a 1-minute elevator ride), it would be the valuation. I do think there’s some weight to the $7500 tax credit and the fact a Tesla will be priced competitively with mid-range sedans, like Toyota or Acura. There are some people who could not afford a Tesla before that now can.

In the face of what I would call a “no bad news is good news” earnings report, it was really the valuation that caused us to enter the stock. If the stock was trading at a more median valuation using 2022 comps, it would have been a harder decision (perhaps we would wait for the Q1 report).

But, with Elon Musk buying Twitter and selling a lot of Tesla stock, the valuation is very low. Even with the current run-up we’ve seen, it remains very low.

In the tough macro of 2022, Tesla’s forward P/S was between 8 and 11.5. It’s currently at 5.5.

The forward PE Ratio is trading at a 45 forward and traded between 55 forward and 75 forward last year in the tough macro:

Finally, if we look at FCF, it’s trading at a steeper discount as it was at 125 prior to October and is now at a 55 EV/Revenue:

Conclusion:

Over the past few years, Tesla has demonstrated excellent operating leverage. The company has halved its average sales price (ASP) between 2017 and 2022, yet improved the GAAP operating margin from (14%) to 17%. This helps illustrate why a lower ASP may not necessarily weigh on the operating margin. The bull case for Tesla is that the higher volume of sales, optimized supply chains/vehicle design, and deflationary pressure on COGS will improve (and/or sustain) the margins over time.

The bear case is that Elon Musk is misrepresenting January orders, that they’re lowering prices due to competition, and the softer gross margin and low FCF this quarter is forewarning of more margin contraction up ahead.

Investors should be aware it was mentioned in the call that “there will be an impact on operating margin in the near term” from the lower prices. What could offset this is a beat on production and deliveries, which as you know, comes out monthly.

Tesla – Q4 Results Strong, Looking for Entry

Posted on January 26, 2023June 30, 2026 by io-fund

We will provide a deeper dive on Tesla soon, however, we are strongly considering an entry for the following reasons:

· Operating leverage: the company is delivering on margins and this is an important box to tick. There was concern that the lower prices would lead to a deteriorating bottom line, but this was not the case.

· Pricing leverage: Tesla’s pricing is becoming more affordable to the middle class and there’s some early evidence this could be met with enough demand to keep the company afloat on revenue growth.

· The valuation is very low, and with an ear towards technicals, we’d like to take advantage of the market’s deep discount on this particular stock.

Tesla reported revenue growth of 37% for revenue of $24.3B. Although this is a deceleration, the bottom line impressed with an operating margin of 16% compared to 14.75% in the year ago quarter. Again, there was built-up anticipation on the operating margin due to Tesla lowering prices, and this hurdle was cleared.

Net income grew 60% in Q4 for a margin of 16.8% compared to 13.10% in the year ago quarter. For FY2022, net income more than doubled.

Perhaps most importantly, Tesla is trading quite low and has not traded this low since “the new macro.” The forward P/S is at 4.7 and the forward P/E is at 36.15. If you take the tumultuous market of 2022 as a comp, Tesla may have 20% and up to 100% room. For the best case scenario to happen, we need broad market participation.

Please follow the forum for entry updates and look for detailed earnings coverage next week.

Snap: Bad Management Team … & WTH is Really Going On.

Posted on October 21, 2022June 30, 2026 by io-fund

I couldn’t be more disappointed with Snap’s management. Not only the lack of guidance but the lack of willingness to describe exactly what the issue is with their business.

In the call, the management said they are seeing 9% growth to-date this quarter yet are modeling revenue to be flat year-over-year. This is an absurd comment to not substantiate. Why would August be 8% growth, October 9% growth and the holiday season be negative growth, which in turn weighs on October’s progress? I’m not sure which is worse, was this a flippant comment they made and we will see 9% or higher growth come next quarter? Or, are they really seeing such a serious headwind that November and December will greatly decelerate? I believe I have identified the serious headwind with no help from Snap’s management team, which I detail below.

Here is one comment that was made on the call regarding the expected revenue deceleration during the holiday season:

“By the end of August, when we shared 8-K about the restructuring, the quarter-to-date revenue had improved to about 8%, and so that implied things accelerated a bit. With the full quarter number at 6% this quarter, obviously, things slowed down into about the low single digits in September, so. And then we’ve seen things move up a bit in the beginning of this quarter with the early weeks being at about 9%.”

Here they try to spin the December quarter:

“It’s Derek speaking. I’ll take the first part of that and then hand it up to Evan. I think first, just stepping back for context on Q4. Even flattish year-over-year revenue growth is about a 15% step-up on a quarter-over-quarter basis. So, we are expecting revenue to grow seasonally at a pretty good clip. So, the issue that we’re seeing here is that if you look back to a year ago, we grew at over 40% year-over-year in the prior year. And many of the really significant macro impacts that we’ve seen over the course of this year weren’t impacting the business nearly as much as they were a year ago.”

To add to the absurdity, they have relied on excuses such as Ukraine, macro for brand advertisers or Apple’s changes. This doesn’t explain why November and December would weigh on October as both are consistent (not variables) throughout Oct-Dec.

Here, an analyst calls out that it doesn’t totally add up:

“Just on the brand side. I think many are curious kind of why brand will suffer so hard going into a seasonally strong period. Is this more macro-related? Is it — given some of the restructuring, is that having some impact?”

This was the answer, which was not a good one: “And certainly, with the performance that we saw from the brand portion of the advertising business in Q3 gives the — sort of informs our expectation of the decel to move through the rest of the quarter.”

So, I’m sitting here wondering why a 19% DAU growth isn’t translating to higher revenue growth and trying to sift through the garbage being stated on the call. Following strong DAU growth for many quarters, management is providing a 6% growth rate this quarter and “maybe” a 9% growth or “maybe” a 0% growth rate. Something is very wrong here.

Furthermore, how can the 19% DAU growth not give them more confidence in terms of the revenue they can drive next quarter?

Because I’ve worked around mobile global UA, I believe the answer to this question is that Rest of World user growth greatly weighs on this company’s business model. This is the only true explanation that makes sense to me. If the majority of the user growth is in the $0.90 ARPU to $1.00 ARPU, then this is going to pull down revenue. This also means that next quarter — even with strong DAU growth — the company cannot accurately guide because ROW cannot monetize high enough to support YoY growth.

I pointed this out in the analysis here for our Re-Entry when I stated: "My interpretation is that DAU will outpace revenue growth because DAU growth will come from Rest of World where users are monetized at a lower rate than North America and Europe. This has been the trend over the past year in Snap’s key metrics."

It’s one thing to have advertiser falloff and softer ARPU in North America in the $8.00 ARPU range (which you’ll see below has not occurred!!) and another thing to have even nominal falloff in a region that is at the $1.00 ARPU range, because the majority of the user growth is occurring here, then it only requires small decimal points to drag down overall ARPU quickly.

My regret is believing management when they said it was “platform changes” or “Apple’s ATT” or “macro headwinds. Excuse my language in this write-up, but instead here is the total garbage investors were offered:

“Operationally, our advertising business has become a lot more technically complex over the past few years as advertisers are working to better measure and optimize their campaigns. That means that we need to drive increased coordination across our sales, engineering and product teams, which is one of the reasons I’m so excited to have Jerry leading these teams as our COO. I’ve already observed a significant change in the way that our teams are working together, and I’m really pleased to see the focus on our advertising customers driving everything that they do […] We saw about an 8% increase in impressions year-over-year in the quarter, which is really a function of daily active users and engagements.”

My note: again, this doesn’t address why there would be a deceleration in Nov/Dec and why they can’t guide. The company had 19% DAU growth and 8% growth in impressions and they can’t give a guide? Very strange.

They said eyeballs are doing well again:

“So, at a very high level, both in the U.S. and globally, viewership is up. And so that means that our overall opportunity is expanding if we can continue to increase folks’ depth of engagement. And that’s really important, of course, for advertisers who really value the reach that we provide.”

Here’s a question where Snap could have been more forthright:

“Ross Sandler:

I just wanted to throw the macro question out. So, it sounds like it’s mostly brand advertising that was weak in 3Q, and it seems like that’s the area that’s forecasted to really drop off as we kind of go forward here in 4Q. So, could you just maybe elaborate a little bit on what you’re seeing? What’s — we can obviously see what’s going on with the macro broadly, but specifically to like rest of this quarter, what commitments you’re looking at that would cause those growth rates to kind of dip into the negative?

And then, related to one of the prior questions, you’re growing your DAUs almost 20% and impressions 8%. So, it seems like we’ve just got a demand problem here, not a supply problem. Can you just talk to that a little bit? Thank you.”

I’ll save you the answer they gave which was evasive and focused on “restructuring, “advertisers can turn performance based advertising off very quickly” and “future of AR”

There were moments where they brought up EMEA and APAC, but this was buried and not discussed as a direct answer to the issue:

“And the third thing is bringing top talent to our three president roles for the Americas, APAC and EMEA. One of them Ronan Harris is going to join us next week. This will ensure that we’re improving our focus on customers in every region and getting closer to the customers’ needs. I think these priorities will set Snap up to be successful in this current environment.”

And then again, it was their last comment before closing the call:

“I think one thing I’m watching specifically is on the sales side. We’ve got these president roles. Ronan Harris is joining a bit later this month as our President of EMEA. We will also have an APAC President and an Americas President, and we’ll be putting folks into those roles as soon as we can. And in addition to that, we’re also thinking about how to better organize our sales teams to go to market in a way that best serves our customers. And we’re sort of thinking about Q1 as the time line for that.”

Yet, if this is what’s going on — and it’s my speculation that it is — the management did nothing to connect these dots and continues to rely on many other trivial excuses that don’t add up to the 6 month variability we are seeing (July-Dec).

I believe they are not connecting the dots because it signals something systemic (not that it matters given the severity of the selloff – they could have not shown up to the earnings call and the stock would probably be doing better today).

It’s systemic because the very regions they can grow DAU will, in turn, weigh on their revenue.

I’ve noted the ROW could be a concern in our previous write-ups, but now that I’ve gotten more information on just how disconnected DAU growth is from revenue growth in Q3, and now in Q4, I feel fairly confident we are looking at company struggling to keep up with previous ARPU that had a higher mix of North America and European growth.

Below is Snap’s overall ARPU. Quick glance shows that it’s declining YoY for Q2. It declined again for Q3 Average revenue per user was $3.11 in Q3 2022, compared to $3.49 in Q3 2021 (not pictured below).

In fact, we can see further evidence of this as ROW declined (9%) and North America only declined (1%).

This makes my bullshit detector go off even more with the Apple excuse because iPhones are not used in ROW regions, instead these regions primarily use Android. Android has not gone through the privacy changes (yet) that Apple has.

If Apple was the issue, North America would have fallen off in ARPU by more than (1%) bc this is the highest concentration of iPhone users. Europe’s (5%) also contributes but the Apple excuse is debunked bc Q3 2021 was when these changes occurred and the YoY would be more drastic in North America if Apple was contributing.

If we look at Q2, another big miss in the earnings report, we see the same pattern. North America was up 8% debunking the Apple issues and ROW is down (11%). This creates a (4%) drag on ARPU.

You can see the largest comp for ROW is approaching, which is Q4’s $1.12. All quarters have a high comp in Q4 but you can see the other regions have been doing a decent job of keeping pace.

On a side note, the company states Russia falls within Europe revenue, so the (9%) in the $1.00 region is also not satisfied by the Russia-Ukraine war excuse. Europe (the Ukraine region) up 2% last quarter in Q2.

So now, it starts to make sense that Snap is not confident about the holiday season as the drag is coming from ROW.

Obviously, I’m incredibly disappointed because the company used the Apple ATT excuse and my understanding is this should be something they can overcome as Snap does not use third party data.

On another note, I firmly believe the company is not selling off due to margins but rather the opaque issues with revenue. This company is going to become FCF positive between $1 billion to $1.5 billion next year and this is well understood. Scanning the analyst notes today, they were encouraged by the bottom line in the report. Not one mentioned ROW revenue, however, despite it’s clear decline in ARPU.

It’s easy to glance at the margins and draw a quick conclusion that the company is very unprofitable, but the well-publicized budget cuts across the board has resolved this issue for the most part.

The market is forward-looking and as soon as next quarter, the shift toward profitability will begin. In fact, the company beat on the bottom line across the board on top of moving toward greatly improved operating income next year. If anything, this was a positive as market expected ($105) million FCF and company reported +$18 million FCF.

If it were the bottom line, it’d be much more straight forward. Instead, I feel the management is dodging the real issue as to why DAU growth does not translate to revenue growth. The longer the DAU strength continues and the longer the revenue weakness continues, the more of a red flag it has become.

Management is responsible for discussing the real issues with shareholders and ROW should have been directly called out in this earnings call and the previous earnings call.

Even worse, to have so many different storylines that don’t add up … Apple, Ukraine, Macro, Brand Ads – during the holidays nonetheless — supposed to get worse from Oct to Dec …? It simply doesn’t sit right.

Conclusion:

I had posted this on the forum in the comments and it sums up my thoughts:

“Snap is pulling levers to not burn cash and will have a 20% FCF positive margin, maybe 25%, and this is well understood at this point. Some people point towards SBC which at $700M net (minus buybacks) is 14% of annual revenue. Not the worst I've seen — cloud is certainly much higher with some favorites in the 30% SBC range.

I believe it's the disconnect between user growth and revenue growth that is causing the selloff, and I think it's important to identify the issue bc Snap will be FCF positive moving forward around $1B to $1.5B — so will Snap's new cash profile (which is widely understood to show up in Q4 and beyond following the layoffs and the shutdown of ancillary products with one-time related costs recognized in Q3) fix the issue? If so, it's a buying opportunity.

I don't think this is a buying opportunity bc what we have is a major disconnect on DAU growth from revenue growth. Why can't the company post a higher growth rate given the 19% DAU growth — usually audience precede revenue growth. If this isn't fixed and the FCF issues are fixed, it may still be problematic business model.”

This write-up was intended to describe what I truly think the problem is with the business model, with no help from management. This correlation would have been much easier to see if Snap had not created many smoke screens to deter from the real issue.

I believe institutional analysts are in the same boat, where Snap’s narrative and excuses has distracted them from looking more deeply at the issue. You can sense on the call, they can’t quite grasp it. It’s not terribly difficult to put together – it’s simply a matter of searching for it, which no one is doing because management is feeding so much garbage on the call.

The conclusion is we are out of the stock with a serious and lingering concern about this management team.

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Conclusion: