Tesla: Bad News Is Good News
Summary
- When contextualised, the Q1 delivery figure was a remarkable feat that signals Tesla's trajectory for the remainder of the year.
- Gross margins are indeed expanding, economies of scale underway and just getting started.
- Tesla on track to deliver almost double consensus deliveries for 2022.
- Europe is a red herring. Tesla's "shortcoming" will be resolved permanently once German production commences; meanwhile, they have already reclaimed Europe EV market share for 2021.
Over the past few years I have witnessed the market and public respond to Elon Musk in peculiar ways, conjuring negative connotations from this photo instead of drawing optimism from this or this.
It is truly irrational that an individual responsible for leading the transition to EVs and the space renaissance, could have their credibility overridden by inhaling a legal substance one time on a podcast - despite these accomplishments (and more). But alas, "bad news" can be good news as I am happy to reap the benefits of irrational reaction - I view these opportunities as a corrective mechanism and you should too. The idea today is to address some more recent events where the market has been drawing negative connotations on Tesla.
2021 Q1 Earnings
First things first: Tesla's Q1 earnings. The outcome was not welcomed by the market with open arms, but I believe there's a lot of good happening under the hood, which I will attempt to decipher. Consensus for deliveries was between 168,000-178,000 (depending on which data provider you look at) and Tesla topped all forecasts by delivering over 184,000 vehicles in Q1. This all took place during a period of semiconductor shortages that left other auto manufacturers like Ford cutting Q2 planned production in half. This is also the same quarter where Tesla produced zero of the Model X or Y due to part shortages and retooling preparations for the refreshed models.
Q1 Seasonality
Some Tesla bears like Gordon Johnson @ GLJ Research (ranked #7,248 out of 7,490 analysts on TipRanks) have emphasized that Tesla only saw a mere QoQ delivery growth of 2%, from Q4 2020 to Q1 2021. What Gordon and others fail to mention, despite Elon reiterating this fact during the earnings call, is that automotive sales are highly subject to seasonality. Here is a snapshot of the pattern in global automotive sales from Q4 to Q1 over the past few years:
- Q4 2017 -> Q1 2018 | 22.2M -> 20.8M = -6.3%
- Q4 2018 -> Q1 2019 | 20.5M -> 19.5M = -4.9%
- Q4 2019 -> Q1 2020 | 20.3M -> 14.6M = -28%
- Q4 2020 -> Q1 2021 | 20.6M -> 17.8M = -13.6
It is no secret there is a seasonal trend in car sales which always dips at the beginning of the year, making it all the more meaningful Tesla managed to conversely increase sales in Q1. When seasonality is involved, any seasoned investor knows it is more appropriate to compare apples to apples by taking a YoY calculation. Comparing Tesla's Q1 2020 results to Q1 2021 gives us an astonishing YoY delivery growth of 108%. While Tesla is a fast growing company and it is advantageous to take an earlier base period, YoY Q1 growth from 2019 to 2020 was "only" 40%, for context. Bottom line, supply and demand is ramping up fast. Tesla should have no problem hitting the milestone of 1M deliveries with Model X/S returning to volume production and Texas and Berlin factories coming online in the latter half of the year.
Market Reception and Silver Lining
The market was disappointed because of a perceived dismissive tone towards FSD (full self driving), as well as lack of explicit guidance. I believe much of the tempering of expectations for FSD was principally motivated from a PR standpoint, due to the recent crash in Texas. Between the amount of miles already ingested and progress on their Dojo supercomputer, FSD seems to be moving along just fine in the background. I'm sure we will be hearing more on this later this year, possibly as early as July during the anticipated AI day event. As for guidance - while Tesla may not have provided explicit guidance, they did drop some particularly insightful clues on the Model Y. Tasha Keeney at ARK Invest did some nice work to reverse engineer Tesla's implied Model Y expectations:
In its first quarter earnings call last week, Tesla stated that the Model Y could become the best-selling vehicle globally based on revenue in 2022 and on units in 2023. For context, in 2019 the Toyota Corolla topped the list with 1.5 million units, roughly triple the number of all Tesla vehicle sales last year. Because the Model Y is roughly twice as expensive as the Corolla, Tesla seems to be forecasting 750,000 units in 2022 and 1.5 million units in 2023, nearly 10X and 20X the 86,000 units sold, respectively, in 2020.
If Tesla fulfills this target and we also account for production of S, X, 3 and Cybertruck (for which there is already well over half a million pre-orders), they should have no problem delivering at least 2M vehicles in 2022. This is almost double market consensus of 1.1M deliveries for 2022, which poses massive upside as long as they stay on track.
Germany Risk
There seem to be no speed bumps for the Texas factory, however in Germany Tesla has faced environmental and regulatory delays, despite rapid structural progress on the Berlin-Brandenburg factory. While Tesla maintains that production would be pushed to later this year, German publication Automobilwoche suggested early 2022 as a more realistic timeframe. Even in this worst case scenario I see a high probability of hitting the 2M mark next year, as it would be highly unlikely the delays extend further into 2022 with the factory itself near completion.
Gross Margins
One last point I want to highlight from Q1 earnings is automotive gross margins, which increased from 24.1% to 26.5%. The bears are quick to blame this on the $101M profit from their Bitcoin sale. The issue is this fails to consider that the Bitcoin gains were more than offset by the $200M hit resulting from the S & X shutdown and retooling, which was mainly embedded in COGS. The argument also fails to consider that the S and X have significantly higher margins and were excluded from the mix. So if we strip things down to recurring margins, Tesla is clearly continuing to expand as they realise economies of scale. Tesla now enjoys a lead over the entire automotive industry and they're just getting started (last FY data):
Source: Bloomberg
The Europe Fallacy
I have recently noticed Tesla bears like Gordon Johnson, or Peter Garnry at Saxo Bank, resorting to Tesla's European market share as a supposed proxy for concern. When you take a closer look however, you discover that Tesla's 3rd place position in Europe is only temporary and almost entirely attributed to vehicle price. With production currently in the US and China, transport costs and high EU automotive tariffs mean Tesla prices will be temporarily inflated until the completion of their manufacturing facility in Germany. Kudos to Budget Direct for putting together this Tesla Worldwide Index, which is like a Tesla version of the Economist's Big Mac Index. Their visualization depicts the average cost of buying a Tesla by country, adjusted for currency:
Source: Budget Direct
Those darker colors in Europe give us an abstract view of how much pricier it is to buy a Tesla in Europe. More precisely, in key European markets like Germany, France and the UK - the average price of a Tesla is at least 34% higher than in the United States.
Source: Bloomberg
Looking at the underlying EV models, we can see why Volkswagen (OTCPK:VWAGY) and Renault (OTCPK:RNSDF) have initially outpaced Tesla in terms of sales in Europe. In Germany, a VW ID.3 starts at €29,430 whereas a Tesla Model 3 base model is €43,800 - almost 50% more expensive. In France, a Model 3 costs more than double a Renault Zoe (€20,700) at €43,800. Given the price elasticity of demand between these pricing levels, I'm honestly shocked Volkswagen and Renault have not widened the gap further. There is also drastic variance between Model 3 pricing in Europe vs North America. In the UK for example, the Model 3 starts at $57,000 which is 46% higher than in the US.
Simply put, Teslas are massively overpriced in Europe. This will all change once Tesla begins production at their Berlin-Brandenburg facility later this year (check out the progress so far). Once there is production on European soil, Tesla will be able to ship Model 3s and Ys (to start) across the continent at much more competitive prices. Given all relevant specs on the Model 3 and Y are superior to the discussed competitors, I see no reason that Tesla should not reclaim a sustained lead. To top it off - the Model 3 has already crushed its competition from the previous quarter by more than double:
Source: InsideEVs
ARK Invest
I still see Tesla getting negative press whenever ARK Invest sells shares. On the surface, I can appreciate the irony of a firm selling their highest conviction position. The reality however is that ARK doesn't just own Tesla, they also trade it. Anyone identifying the recent sale of shares as a negative signal must have overlooked ARK's major buying activity during the dip in February, when they picked up more than 240,000 shares across multiple funds. With the stock recovering since, ARK's funds inevitably became highly concentrated in Tesla, so it only made sense to take profits. The same logic followed for ARK's sale of shares back in May last year, when the share price skyrocketed and they became overly concentrated. ARK has always kept Tesla as the top position in any fund they hold it in at around 10%, but anything more would be too concentrated - in the words of Cathie Wood: "That would not be wise portfolio management".
In Closing
We hardly scratched the surface, as we have yet to properly discuss FSD - same goes for energy, solar roofs, robotaxis, manufacturing & process innovation, neural nets and the rest of Tesla's roadmap. A long-term comprehensive overview of Tesla is coming, so stay tuned. In the meantime, when it comes to bad press on Tesla (or anything for that matter), I encourage you to challenge yourself and determine what is material - and what is not. If all else fails, you can always count on this one:
It Ain't What You Don't Know That Gets You Into Trouble. It's What You Know for Sure That Just Ain't So. - Mark Twain
This article was written by
Analyst’s Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (416)
types a chance to use your math skills doing conversions into the currency of your choice.Toyota Motor Corp. managed to navigate the pandemic and related economic fallout for fiscal 2020, boosting its net profit by 10.3% from the previous year to ¥2.25 trillion.The firm projects that about 80% of new car sales by 2030 will be electric vehicles, including hybrids.For the current fiscal year through March 2022, Toyota projects the following:Sales of ¥30 trillion, up 10.2%
Operating profit of ¥2.5 trillion, up 13.8%
Net profit of ¥2.3 trillion, up 2.4%
For fiscal 2020, the world’s largest automaker beat its forecast of securing ¥2.2 trillion in operating profit, ending up with more than four times its initial projection of ¥500 billion.The firm posted sales of ¥27.21 trillion.In April this year, Toyota posted unit sales of 982,912 in March — a record for a single month — up 44.2% compared with the same month last year, thanks to strong performance in China and North America.
Anybody can bandy about Toyota's number or VW's numbers or GM's.When you do this it shows a missing of the point.It isnt about how many cars the legacies will sell this year, it's about how many they will sell in 4 or 5 year's time.2 things we know about new technologies:
1. They get better
2. They get cheaperBEVs have a dozen new technologies in them. They have gotten cheaper and better over the past years. You can see this with the current M3/Y or the Mach E. The path for them to continue their technological progression together with a lower cost is clear to everyone. By 2025 at the very latest, BEV will be better than ICE in every meaningful metric. Remember 20 years ago when a new 40" flat screen was $4,000? Now you can buy a much better TV for $100. This is how tech and pricing works.What happened back then? People who would otherwise have upgraded their old CRT TV decided to wait a year or 2 until flat screens came down in price. The writing was on the wall. Old style TVs became stranded assets, nobody wanted them. The used TV market was flooded.All of you are reading this on your smart phone, none of you are using a Nokia flip.Cars are no different. So when people talk about Toyota or VW's 10,000,000 auto sales, they are not looking at the future. The Mach E by all reports is a great car, it seems to be a close competitor to the MY in most aspects of the car. But Ford is targeting 50,000 units for the year. Why not 400,000? It's because they know where their profits reside? They cannot yet build a Mach E at a profit. The MY production and sales for this year is expected, even by the bears to be 400 or 500,000 cars.Ford, GM, Toyota are not able to produce in volume and at a profit, nor will they be able to within the next some years. They have huge debts, which are not an issue today but when people start delaying their next vehicle purchases, they will not be able to service their debt.That is why when people say "the OEMS sell 10 or 20 x Tesla's volumes", it is not a thoughtful argument.
" why it should lend credence to illogical statements and hyperbole. "
Tesla has the largest 5year CAGR at their scale than has ever been seen before. If your gut reaction to this is that it is illogical and hyberbole, you might want to stick to mutual funds instead of doing your own analysis. If it is not obvious for anyone, then they don't pay close enough attention to the basic fundamental metrics of growth stocks."Please tell us why size and quantity of one's collection of personal attributes"Do you really think a database is a listing of personal attributes? Not just a bloomberg terminal, or a database of stock prices, buy any database?
"Selling stock and bonds and doling out stock options are the company's core businesses."I'd like to see your valuation model that backs this up.
1. Why would you lend a massive company $100 for no reason other than to buy one? Do you tell people you have a reservation knowing you're going to look stupid later on? Or do you keep it secret and get your money back?
2. Tesla went low and refundable because naysayers said that the Model 3 non-refundable £1000 deposit was unreasonable.
Go naysayers! Right every time! Yeah right.
www.reuters.com/...Is that good news or bad news?
battery production in Grünheide was a back and forth story: first they planned to have a battery production, then they planned to buy the cells in Polen, now they plan again to produce them. I guess it might take years until they have an own cell production, because they underestimated by far the way from a lab cell to mass production. So they tried to get the cells in Polen, but manufacturers already got lots of contracts from VW and others, so Tesla is last in the lane and they did not get a contract for acceptable costs. Now they try to build the production on their own, but I guess this will take until 2023, 24 or maybe never.
They have a production capacity of 250K per quarter, but they sell 180K only. So maybe they simply don't need this factory. Tesla cannot cut prices further, so they cannot sell enough cars to keep this factory running. So they postpone it on and on again because this is better than showing investors huge losses or a giga factory running far below capacity.
They are expected to achieve 250k/Q sometime this year, just haven't got there yet. Probably requires some output from German and Texas factories to get there. Model S & X were shut down for the whole quarter.
