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Investment Thesis
As the electric vehicle ("EV") landscape accelerates, Tesla (NASDAQ:TSLA) is not just keeping pace but setting a scorching track record. In Q3 2023, the company marked a significant milestone in its journey, dazzling the industry with 430,488 vehicles and deliveries totaling 435,059 units.
These numbers aren't merely impressive; they represent Tesla's extraordinary scale, unwavering commitment to operational excellence, and mastery in meeting robust market demand. Therefore, the pullback in TSLA and these achievements reaffirms the strong buy rating for the stock.
TSLA remains a strong contributor to the Yiazou model portfolio, but since I am also trading the stock on my personal portfolio, I have sold my position to take advantage of the recent peak. Nevertheless, I am planning to reenter at current levels following the pullback.
Impressive Vehicle Production and Deliveries
In Q3 2023, Tesla reported notable production and delivery figures. The company produced 430,488 vehicles and delivered 435,059 vehicles, reflecting its impressive scale and consistency in increasing production and deliveries. Tesla's production and delivery volumes have increased, indicating its operational efficiency and the strong demand for its EV.
In detail, during Q3, production increased by 18% year-over-year, highlighting the company's capacity expansion and efficiency improvements. Deliveries grew by 27% year-over-year, indicating increased production and the successful distribution of vehicles to customers. This consistent growth in production and deliveries indicates that Tesla is well on track to achieve its 2023 volume target of around 1.8 million vehicles. This impressive production and delivery performance is a key driver of the company's value growth potential.
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Soaring Revenues and Strategic Diversification Amidst Global Challenges
One of Tesla's primary strengths is its consistent and impressive revenue growth. In Q3, Tesla reported total revenue of $23.4 billion, representing a 9% year-over-year increase. This revenue growth is a result of an increase in vehicle deliveries. In the third quarter, Tesla achieved growth in this area, contributing to its overall revenue expansion.
While vehicle sales remain a substantial portion of Tesla's revenue, its efforts to diversify revenue streams have been paying off. Revenue from other parts of the business, such as energy and services, also contributed to the overall revenue growth. This diversification mitigates the risk associated with relying solely on automotive sales.
Although there was a reduction in average selling price (ASP) year-over-year, it is important to note that this reduction was partly due to pricing and mix changes. Tesla's ability to adapt to market conditions and adjust pricing to remain competitive is a strategic strength that allows it to maintain sales volume and market share.
On the downside, a negative FX impact of $0.4 billion was reported in Q3. While this dampened year-over-year revenue growth, it's essential to recognize that Tesla operates in a global market and is exposed to currency fluctuations. Managing such impacts is just part of its financial expertise.
Finally, the Q3 report indicates that the company plans to grow production as quickly as possible, aligning with its long-term target of a 50% compound annual growth rate it began guiding in early 2021.
Tesla Q3 Update Deck
Navigating Short-Term Costs for Long-Term Innovation and Market Leadership
While Tesla's operating income decreased 52% year-over-year in Q3 to $1.8 billion, resulting in a 7.6% operating margin, it's essential to understand the specific factors affecting profitability.
As mentioned earlier, the reduced ASP hurt operating income. On the other hand, the increase in operating expenses driven by projects such as the Cybertruck, AI development, and other research and development initiatives impacted operating income. While this may have weighed on short-term profitability, it is an investment in long-term growth and innovation, which is crucial for Tesla's future competitiveness.
Additionally, the cost of production ramp and idle costs related to factory upgrades are short-term expenses aimed at improving production efficiency. These investments can lead to cost savings in the long run, making Tesla more competitive in the EV market.
Despite the challenges, Tesla reported gross profit growth in segments such as Energy Generation and Storage and Services and Others, highlighting the effectiveness of diversifying revenue streams and the potential for these segments to contribute significantly to profitability in the future.
Tesla Q3 Update Deck
Advancing 4680 Cells, AI-Powered Autopilot, and Optimus Robot in Q3
Tesla is making progress with the development and production of higher-density 4680 cells. These battery cells are more energy-efficient, offering increased range and performance. During Q3, the adoption of an 800-volt architecture for the Cybertruck is notable. This architecture may bring significant cost savings and demonstrates Tesla's dedication to engineering efficiency.
One of Tesla's most significant strengths lies in its Autopilot and AI technology. As of the latest update, Tesla vehicles have driven over 0.5 billion miles with the Full Self-Driving (FSD) beta. This real-world data collection and training set Tesla apart from its competitors. The immense amount of data gathered from these miles provides a deep pool of information for refining and improving autonomous driving algorithms. It's important to note that training data is a critical limiting factor for the progress of self-driving technology.
Additionally, Tesla's AI and FSD version 12 advancements are a game-changer. FSD version 12 leverages end-to-end AI, taking photons as input and providing control outputs. This mimics the human perceptual system, with a large bitstream of input data being compressed into a small set of control outputs. Tesla's approach closely resembles how humans process information, primarily through optical inputs from their eyes. This alignment with the human perceptual system sets Tesla's technology apart.
Finally, the company has more than doubled the size of its AI training compute to accommodate its growing dataset and support projects like the Optimus robot. Also, the development of a humanoid robot, Optimus, using AI rather than hard-coded software, is an example of Tesla's innovative approach to automation and robotics.
Tesla Q3 Update Deck
Energy Storage Business Growth
Tesla's energy storage division is another fundamental strength with rapid value growth potential. In Q3, it became one of the company's highest-margin segments. Energy and service contributions to quarterly profits exceeded $0.5 billion. Tesla's energy storage deployments increased by 90% year-over-year in Q3 to 4.0 GWh.
This growth is attributed to the ongoing ramp of Tesla's Megafactory in Lathrop, which is working toward a full capacity of 40 GWh. The demand for clean energy and efficient energy storage solutions continues to rise globally. Therefore, Tesla's ability to provide high-quality energy storage products positions it well to capture a significant share of this growing market.
Capacity Expansion and Global Presence
The company has strategically opened new factories in different parts of the world. The factories in Berlin and Austin are critical components of this expansion.
The capacity to manufacture vehicles locally in different regions reduces shipping costs and allows Tesla to cater to local markets more effectively. During Q3, there was an increase in Tesla's locations (sales, service, delivery, and body shop) by 25% year-over-year. Also, the number of supercharger stations and connectors increased by 31% year-over-year.
Finally, the upcoming Gigafactory in Mexico adds to Tesla's global footprint, enabling it to tap into a new market. Tesla's ability to adapt and expand its production capacity and market share based on regional demand is evidence of its agility.
Tesla Q3 Update Deck
Cybertruck: Musk Tackles Production Hurdles
While Tesla's Cybertruck is a highly anticipated product, with over 1 million reservations for the Cybertruck being a recent example, in the earnings call Elon Musk acknowledged the enormous challenges in bringing the Cybertruck to volume production and making it cash flow positive. Creating a product with advanced technology and a unique design, like the Cybertruck, presents specific obstacles. One notable point made by Musk is that prototypes are relatively easy to create, but the transition to volume production is exceptionally challenging.
Musk's caution about the time and effort required for the Cybertruck to become a significant positive cash flow contributor indicates a practical approach to growth. Elon Musk acknowledges it could take 18 months or longer before Cybertruck becomes a significant positive cash flow contributor. Production difficulties could lead to delays and increased costs, impacting Tesla's profitability.
Tesla Q3 2023 Earnings Q&A with VP, IR Martin Viecha
Official Report Suggests Tesla's Cybertruck to Sport a Hefty Tag and Weight
Cybertruck is set to debut in its 2024 model year and will likely start with only all-wheel-drive versions, as indicated by the absence of a single-motor (two-wheel-drive) option in the VIN decoder document.
This decision implies that the initial models of the Cybertruck might be more expensive, since two-wheel-drive variants typically cost less and are often offered as entry-level options. Furthermore, the VIN decoder reveals that the Cybertruck, like other electric trucks, will be considerably heavier than traditional gas-powered trucks, mainly due to the substantial weight of their battery packs.
Despite the growing competition in the electric truck market, with entries from Ford (F), General Motors (GM), and Rivian (RIVN), Tesla's decision not to offer a two-wheel-drive version aligns with current industry trends where similar EV trucks are also primarily all-wheel drive.
This approach might be partly influenced by manufacturing challenges and the goal of profitability, as suggested by Elon Musk's comments on the difficulties in mass-producing the Cybertruck and achieving positive cash flow from it.
Cost Reduction Efforts
A fundamental strength of Tesla is its consistent focus on reducing the cost per vehicle. In Q3 2023, Tesla's cost of goods sold per vehicle decreased to approximately $37,500. While it's essential to understand that production costs at new factories remained higher than at established factories, Tesla took proactive measures by implementing necessary upgrades in Q3 to enable further unit cost reductions.
Overall, this cost reduction effort aligns with Tesla's belief that an industry leader needs to be a cost leader. The company maintains competitiveness by consistently driving down production costs and ensuring higher profitability. Therefore, lower production costs also have the potential to lead to more affordable vehicle offerings, expanding Tesla's customer base.
Tesla Q3 Update Deck
Tesla's ASP Dip Amid FSD & Economic Challenges
One key weakness in Tesla's Q3 2023 report is the reduced ASP year-over-year. This reduction in ASP is primarily attributed to pricing and mix. If lower-priced models (e.g., Model 3/Y) make up a significant portion of the sales mix, it can drive down the overall ASP. Economic conditions, consumer preferences, and incentives also influenced the ASP. For example, changes in government incentives or economic downturns can impact consumers' willingness to pay a premium for EVs.
Critically, Tesla's focus on FSD technology is a fundamental aspect of its future growth. The development of autonomous driving systems is highly complex and carries significant regulatory and safety risks. If Tesla faces delays or regulatory hurdles in deploying FSD, it may impact its value growth potential. Likewise, the high-interest rate environment affects car affordability. Monthly costs for customers influence Tesla's pricing strategy, and rising interest rates may impact the cost of financing a Tesla vehicle.
Lastly, Tesla's energy storage business is a growing source of profit. However, Megapack deployments can be lumpy. Variability in deployments may impact the energy division's contribution to quarterly profit. Finally, the Q3 report revealed a decline in solar deployments, down 48% year-over-year to 49 Megawatt. This decline is attributed to sustained high-interest rates and the end of net metering in California.
Takeaway
Tesla's Q3 2023 results illustrate a dynamic blend of triumphs and challenges in the evolving EV and energy sectors. Dominating with record-breaking production and delivery of 435,059 vehicles, Tesla underscores its leadership and ambition in the EV market.
However, the company faces challenges like a reduced ASP due to a shift in sales mix and economic factors, along with the high costs and risks associated with scaling up innovative products like Cybertruck and FSD technology.
Despite these challenges, Tesla's commitment to cost reduction, global expansion, and advancements in AI, battery technology, and energy solutions mark its enduring commitment to driving the future of sustainable technology and transportation.
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