Investor Spotlight: Tesla's earnings disappointment

Tesla: just an automotive company or so much more?

I must admit, I was genuinely surprised that the market believed Tesla could surpass earnings expectations after the stock price surged by over 100% this year.

At the heart of Tesla lies a transformative story of becoming a 20 million EV manufacturer by 2030. So far, Musk and Tesla's workforce remain five years ahead of the competition in the US, as stated by fund manager and shareholder Hatem Dhiab from Gerber Kawasaki.

Currently, Tesla's main competition comes from Chinese manufacturers, with whom the company directly competes in the domestic market.

Tesla's second-quarter earnings results were largely in line with the market's expectations. Total revenue reached US$24.93 billion, a 47% year-on-year increase, with automotive revenue reaching US$21.27 billion, exceeding the Street's estimate of US$20.88 billion, according to Dan Ives.

The company is on track to deliver 1.8 million EVs in calendar year 2023, up from 1.3 million in 2022.

Market share of Tesla vehicles by region chart

The all-important automotive margins ex credits came in higher than forecast at 18.1%, compared to consensus of 18% and a whisper figure of 17.5%.

Musk's strategy to sustain demand

Elon Musk has consistently emphasized that electric vehicles are discretionary, price-sensitive goods. As interest rates have been on the rise in the past 18 months, affordability for EVs has declined. Many consumers finance their EV purchases through credit.

To maintain demand, Tesla has implemented price cuts to boost sales. This strategy involves a trade-off: the company either produces fewer vehicles or reduces prices and margins to sustain and expand market share. Tesla's focus on growing and maintaining its market share positions the company favorably for a potential improvement in affordability as interest rates decline.

Additionally, Tesla is working on scaling its two new giga factories in Berlin and Austin. Scaling production takes time, and margins may initially decline before recovering as volumes increase. Lower commodity prices, particularly for nickel, cobalt, and aluminium, have benefited the company, although some of the lithium contracts are longer term, providing a percentage of the cost of goods sold (COGS) benefits from lower spot lithium price contracts.

The reality of full self-driving vehicles

Elon Musk has always been vocal about Tesla's aspirations to develop full self-driving vehicles (FSD). The company relies on existing Tesla drivers to log millions of hours of data, creating the neural pathways for visual technology to enable vehicles to operate without human intervention.

Although the software is currently in the beta phase, Tesla has amassed over 300 million hours of data, which is processed on Nvidia's Graphics Processing Units (GPUs) in Dojo, a supercomputer analyzing vast amounts of driving data. Priced at US$10,000, FSD is expected to eventually generate a software-as-a-service-like earnings stream for the company.

During the earnings call, Musk also discussed Tesla's demand for Nvidia's chips and the possibility of licensing FSD to other Original Equipment Manufacturers (OEMs). The company is currently in talks with an OEM, rumored to be Ford.

Broker calls on Tesla

Following the recent earnings results, several analysts have upgraded Tesla's stock price targets.

Buys

• Dan Ives, Wedbush Securities – price target upgraded to $350 from $300
• Vijay Rakesh, Mizuho – price target raised to $330 from $300
• Emmanuel Rosner, Deutsche Bank – price target lifted to $300 from $270.

Holds

• William Stein, Truist – price target raised to $254 from $240
• Jeffrey Oseborbe, TD Cowen – price target lifted to $200 from $150
• Colin Langan, Wells Fargo – price target retained at $265.

Sell

• Ron Jewsikow, Guggenheim – lifted the price target to $125 from $112.

According to Barron's, 43% of analysts covering the stock have a Buy rating, and the average price target rose to about $235 from $230.

Tesla daily chart

Markets disappointment and Tesla's path to success

The market's disappointment regarding Tesla's earnings results largely stems from concerns over automotive margins and rising competition. As Musk openly acknowledges, cars and EVs are discretionary goods heavily influenced by affordability. Tesla's share price performance will be closely tied to EV production numbers, capacity scaling, efficiency improvements, and cost reduction strategies.

While the AI aspirations of Full Self-Driving (FSD) are still on the horizon, devoted believers continue to support Tesla's margin accretion, envisioning the company's evolution into a comprehensive mobility and energy conglomerate.

Analysts like Dan Ives draw parallels between Tesla and Apple in 2008/9, highlighting the long-term potential of the company. Ultimately, whether one chooses to invest in the Tesla story depends on their belief in Musk and his team's ability to succeed.