Revenues:
We expect revenues to grow at a CAGR of 31% between CY22-24. The price reductions in the last few months will start impacting revenues in Q1CY23 and if left unchanged will partially offset delivery volume growth (37% CAGR between CY22-24) led revenue growth in CY23. We expect TSLA’s ASP at $47,800 & $46,300 per car in CY23 & CY24 respectively. Since delivery volumes are capacity constrained, any upside to our current estimates will emanate from price increases if instituted by TSLA over the forecast period. We expect TSLA to deliver 1.8 mm & 2.5 mm cars in CY23 & CY24; any number above 2.5 mm cars will require capacity expansion announcement at Shanghai, Texas, or Berlin plants. Given TSLA’s volume growth focus, we have already baked-in 500K cars/annum expansion between the three plants (Shanghai, Texas & Berlin) over their combined current nameplate capacity.
Margins:
The company delivered Lower gross margins (24%) compared to our expectation of 27% in Q4CY22. The energy generation and storage segment gross margins have turned around and are firmly in the 7% range. Services & Other segment gross margins also beat our estimates. So, why are TSLA’s automotive segment gross margins for CY22 in the 25% range while other Detroit car manufacturers struggle to make it to double digits?
A) Manufacturing Process: One of the reasons is its advanced car manufacturing process. It uses Gigapresses, giant aluminum die-casting machines, which eliminate about 60 welds of different parts to create large single monolithic car body structures. Using a Gigapress, TSLA makes a three-piece chassis (front, rear, and mid) while other cars use chassis made by welding hundreds of parts together. Owing to such innovations, TSLA produces a Model Y in 10 hours, 3x faster than its closest competitor and at costs 40% lower than its peers. While other manufacturers can certainly copy TSLA, it takes time, lots of testing, and effort since eliminating hundreds of car parts and changing existing assembly lines is a long-term project fraught with risks both to the brand and the quality of the car. Our industry checks suggest ICE cars are unlikely to move to the Gigapress manufacturing process while new EV lines would consider using Gigapresses, effectively, sealing TSLA’s manufacturing cost advantage to ICE cars.
B) Pension Costs: Secondly, TSLA also doesn’t have any legacy pension costs most of its peers bear.
Positive operating leverage on R&D costs and SG&A partially offset by lower gross margins helped increase EBIT margins by 130 bps to 16% in Q4CY22. For CY22, Gross Margin/car decreased by 3% YoY, and EBIT/car increased from $7,000 in CY21 to $10,000 in CY22. The company appointed its China head, Tom Zhu, to take charge of all operations in North America and Europe in early Jan 23. We expect cost rationalization to continue in CY23 while price reductions will be a headwind to margin improvements. As competition increased in the EV space, TSLA reduced prices, so margin improvements are unlikely to provide meaningful operating leverage in the future. If TSLA has to increase its operating leverage, they need to improve software and services sales and rely less on car unit sales growth.
EPS:
We expect TSLA to grow EPS at a CAGR of 16.7% between CY22-24E driven by 31% CAGR revenue growth (37% CAGR volume growth offset by -6.6% CAGR ASP) partially offset by higher COGS growth leading to a 19% CAGR Gross profit growth & EBIT growth during the same period.
TAM:
If TSLA is the Dell of car manufacturing, the question is can TSLA move beyond hardware? Dell couldn’t due to various reasons but if TSLA can move beyond hardware, it would significantly expand its TAM. Based on Historic averages and the three regions where Tesla has a production plant, the US, EU & China, the total sales of passenger cars are 50 million cars per year. With Tesla expected to produce 2 million units in CY23, it’s at 4% of the total market share of these regions. As of now, the penetration of EVs is at such a low level that TAM is not an issue for TSLA. Once EVs cross 50%+ penetration, TSLA will have to look for other TAM opportunities if it is to continue commanding premium valuations compared to its automobile manufacturing peers.
Risks:
A) TSLA has proved its manufacturing prowess, however, sales will be a new frontier. So far, the company didn’t have to worry much about sales since its manufacturing capacity was well below the demand in a growing EV space without any major competition. Now, there are many competitors in the EV space offering cars that are more affordable than TSLA’s. Moreover, TSLA has increased its manufacturing capacity at a CAGR of 40-50% over the last few years and hence the law of large numbers also kicks in; sales are not an absolute given with much higher production (2.5 mm cars/annum in CY24E) and increased competition.
B) TSLA has reduced prices in the last few months to increase demand and if it continues to reduce prices, its growth could be impacted drastically since volume growth will be offset by price reductions. Given the high growth valuation multiples and the premium it commands over its peers, slower growth is not an option for TSLA if it were to maintain its premium valuations.
C) Geopolitical Risk: TSLA’s Shanghai plant is its largest (50% of total capacity in CY23E) and lowest cost production facility which if impacted due to political tensions between the US & China could hurt TSLA’s stock price.
D) Keyman Risk: TSLA brand is linked to Elon Musk; any risk to Elon Musk’s reputation impacts TSLA (e.g Twitter acquisition controversy)
Valuation:
As with many quality growth stocks, valuation is the only major concern for the stock. TSLA trades at 54x CY24E PE multiple and 2% TTM adj. CFO yield.
| USD Mn | 4QCY22 | YoY | QoQ | Remarks |
| Revenue | 24,318 | 37.2% | 13.3% | led by growth in cars delivered, 33% YoY growth partially offset by FX impact of $1.4B. |
| Gross profit | 5,777 | 19.2% | 7.3% | higher asp’s partially offset by increases in raw material prices, negative FX impact, cost of production ramp of 4680 battery cells |
| EBIT | 3,901 | 49.3% | 5.8% | positive operating leverage from lower growth in r&d, sg&a costs partially offset by lower gross margins and negative FX impact |
| Net profit | 3,707 | 58.2% | 11.3% | higher interest income and lower tax rate compared to the base Q4CY21 quarter |
| Gross Margin Auto Sales | 23.8% | (510) bps | (250) bps | 1% higher ASP YoY in Q4CY22 offset by negative FX impact, higher commodity and logistics costs |
| EBIT margin | 16.0% | 130 bps | (120) bps | positive operating leverage, higher other businesses GMs partially offset by lower Auto GMs & negative FX impact |
| NPM | 15.2% | 200 bps | (30) bps | lower tax rate and higher interest income |
| Source: Company Reports, BayFort Capital Research | ||||
| Major Segments Rev. (USD Mn) | 4QCY22 | YoY | % of Total | Remarks |
| Automotive Revenues | 21,307 | 33.4% | 87.6% | led by 31% YoY car delivery growth and a 1% increase in car ASP in Q4. |
| Energy Generation & Storage | 1,310 | 90.4% | 5.4% | growth led by powerwall demand |
| Services & Other | 1,701 | 59.9% | 7.0% | led by car deliveries with services such as insurance |
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