Tesla missed on both the top and bottom line as weak ASP cut into revenues, with the EV manufacturer posting automotive revenue growth of just 1.9% YoY despite a 19.5% YoY increase in deliveries. That statistic is key, as it reflects the idea that Tesla may be moving from a margin issue to a revenue growth issue.
We are starting to see signs of margins stabilizing, with automotive gross margin rising ~85 bp QoQ to 17.2% and operating margin improving 60bp QoQ to 8.2%; however, margins are not in the clear based on recent price cuts and commentary from management regarding cost reductions. This now raises red flags that Tesla will face revenue growth issues moving forward stemming from “notably lower” volume growth and heightened competition from BYD in China and globally. We covered this for our free readers early-on here and here.
Revenue and EPS:
As stated, Tesla missed on the top line and bottom line.
- Q4 revenue of $25.17 billion missed estimates by 2.3%, representing YoY growth of 3.5%.
- Q4 non-GAAP EPS of $0.71 missed estimates by 4%, representing a YoY decline of (-40.3%).
- FY23 revenue of $96.77 billion increased 18.8% YoY from $81.46 billion in FY22.
- FY23 non-GAAP EPS of $3.12 declined (-23.3%) YoY from $4.07 in FY22.
Margins:
In Q4, average selling prices declined (4.3%) QoQ to $42,579 as price cuts continued; this also represented a (17.9%) YoY decline from an ASP of $51,887 in Q4 2022. This major weakness in pricing is significantly impacting revenue growth and margins.
- GAAP gross margin was 17.6% in Q4, representing a decline of 612 bp YoY and ~300 bp QoQ.
- Automotive gross margin (excluding regulatory credits) was 17.9%, a 707 bp YoY decline but improving 86 bp QoQ.
- Operating margin was 8.2%, a 784 bp YoY decline but improving ~60 bp QoQ.
- Adjusted EBITDA margin was 15.7%, down 652 bp YoY and ~400 bp QoQ.
- FY23 GAAP gross margin of 18.2% declined 735 bp YoY from 25.6% in FY22.
- FY23 operating margin of 9.2% declined 758 bp YoY from 16.8% in FY22.
- Adjusted EBITDA margin of 17.2% declined 637 bp YoY from 23.6% in FY22.
Cash and Debt:
Operating and free cash flow growth was one of the strongest parts of the report.
- Cash and equivalents totaled $29.09 billion.
- Debt and finance leases totaled $5.23 billion.
- Operating cash flow increased 33% YoY to $4.37 billion in Q4. FY23 operating cash flow of $13.26 billion declined (10%) YoY.
- Free cash flow increased 45% YoY to $2.06 billion in Q4. FY23 free cash flow of $4.36 billion declined (42%) YoY.
Other Segments:
- Energy storage deployments were 3,202 MWh in Q4, up 30% YoY. FY23 energy storage deployments rose 125% YoY to 14,724 MWh.
- Energy storage revenues increased 54% YoY to $6.04 billion, generating gross profit of $1.14 billion. Energy storage now represents more than 6% of revenue, compared to less than 5% in 2022.
- Solar deployments were 41 MW in Q4, down (59%) YoY. FY23 solar deployments declined (36%) YoY to 223 MW, reflecting global weakness in solar deployments.
Volume Growth Concerns
One of the most telling comments from the Q4 release was Tesla’s call for reduced vehicle volume growth, with CEO Elon Musk saying that the weak growth forecast stems from Tesla gearing up to produce a next-generation model.
Tesla explained that in 2024, its “vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” Production grew 35% to 1.845 million vehicles while deliveries grew 38% to 1.808 million vehicles. Calling for a notable slowdown in volume growth raises some substantial red flags as Tesla has recently prioritized volume growth over margins. This is important here as primary rival BYD has surpassed Tesla as the largest BEV market on a quarterly basis and is on track to likely overtake Tesla on an annual basis this year.
CEO Elon Musk emphasized said just in Q2 that “it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.” CFO Vaibhav Taneja reiterated that in Q3, saying Tesla is “focused on reducing costs, maximizing delivery volumes, and continuing making investments in the future.”
What the bull case needs here is irrefutable evidence that this next-generation platform will aid significant growth in vehicle volumes in 2026, as not only is Tesla increasingly at risk of losing its top spot to BYD, but it’s also now opening the door for revenue growth issues.
We do want to reiterate our stance, that this is not a Tesla-specific issue, rather is widespread throughout the automotive sector. We stated this in the July earnings write-up: “While some will talk about recurring software revenue from robotaxis as the most important catalyst, the harsh reality is that the FED lowering rates is the most important catalyst for Tesla today. That may not be as exciting as AI, but Tesla is one of many tech stocks whose revenue growth and profitability is on borrowed time until the Fed instills a more dovish policy.”
What is Tesla-specific is BYD passing the company last quarter, which we made sure to highlight for our readers. This means Tesla is battling both the FED and China, two foes that are known to either stifle innovation by making cash harder to come by or known to undercut innovation in the United States by creating pricing wars.
From Margins to Revenue Growth Issues
Q4’s earnings highlighted the idea that Tesla may be shifting from margin issues to revenue growth issues, especially as vehicle selling prices remain depressed. In Q4, average selling prices declined (4.3%) QoQ to $42,579 as price cuts continued; this also represented a (17.9%) YoY decline from an ASP of $51,887 in Q4 2022. This major weakness in pricing is significantly impacting revenue growth and margins.
Deliveries grew 19.5% YoY to 484,507 vehicles, but the sharp decline in ASP weighed heavily on automotive revenue (excl. reg credits), which came in at 1.2% YoY to $21.13 billion. This was also evident compared to Q2: Q4’s deliveries were nearly 4% higher than Q2’s, but automotive revenues were just 1% higher because ASPs continued to fall.
Revenue Being Revised Lower:
Tesla has already cut prices twice in January, by (3%) to (6%) on the Model 3 and two Model Y variants in China, followed by (4%) to (8%) cuts on Model Y variants across Europe. This raises the risk that revenue growth in Q1 and Q2 will remain in the single-digits, with revenue revisions being pulled lower for both quarters and the full year.
- Q1’s revenue estimate already has been revised 4% lower following Q4’s miss, from $26.8 billion to $25.7 billion
- Q2’s revenue estimate has been revised 4.5% lower, from $28.8 billion to $27.5 billion.
- As a result, FY24’s revenue estimates has been revised 7% lower, from $118 billion to $109.8 billion, pointing to just 13.5% YoY growth, a 5 percentage point slowdown from 2023.
Commentary:
The conference call shed light on how Tesla was able to drive a small improvement in automotive gross margin, but comments from Musk portrayed the difficulty in finding a concrete bottom for margins.
Management explained that Tesla continues “to see improvements in our per unit cost despite us being in the early phase of Cybertruck ramp. As a result, our auto gross margin improved sequentially.” This was evident with the (5.3%) QoQ decline in vehicle production cost to $35,504, which was likely driven by decreasing lithium prices.
While this decline aided margins by offsetting a (4.3%) QoQ decline in ASP, management added that “while the teams are focused on cost reductions, we are approaching the limits within our current platforms.” This suggests that the pace of cost reductions is slowing and may reach a point where it is unable to fall further, meaning that cost reductions may not be enough to offset the price cuts already seen in Q1.
Musk added that if “interest rates come down quickly, I think margins will be good. And if they don't come down quickly, they won't be that good.” Rates are expected to remain above 4% until December, so vehicle affordability may remain pressured from a consumer standpoint and require more price cuts, thus impacting margins.
When discussing competition, Musk did little to assuage concerns that Tesla may fall behind BYD as volume growth slows. Musk said that the “Chinese car companies are the most competitive car companies in the world. So I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established. Frankly, I think if there are not trade barriers established, they will pretty much demolish most other car companies in the world.”
In 2023, BYD delivered 1.57 million BEVs, up 73% YoY to land about 13% shy of Tesla’s 1.808 million deliveries. Assuming a 20% growth rate for deliveries next year, Tesla would be on track to deliver approximately 2.15 million vehicles, meaning BYD’s growth would only need to be 40% to overtake Tesla next year. Given that BYD is growing tremendously in China, maintaining a growth rate above 40% might not be extremely difficult.
Conclusion
Tesla’s double miss in Q4 came despite a sign of stabilizing margins, with the automaker now opening itself up to revenue growth risks as ASPs are declining nearly as quickly as deliveries are growing. Q4’s automotive revenue rose just 1.9% YoY despite 19.5% YoY growth in deliveries, and high single-digit percentage price cuts in January raise the risk that revenue growth remains weak in Q1 and Q2. Comments about notably lower volume growth in 2024 due to a focus on ramping up a next-generation vehicle platform with a start of production date in late 2025 paves the way for BYD to surpass Tesla’s annual volumes this year.
In light of the weaknesses in Q4, Tesla’s valuation is starting to approach levels where it has previously bottomed: shares are now trading below 5x forward sales, the lowest level since May and approaching January 2023’s bottom at 3.5x.
We will keep watching Tesla’s valuation should shares keep declining. Please follow Knox’s technical analysis and webinars for more details.
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