ii view: Tesla shares in reverse as inflationary costs dent margins

Vehicle price cuts are likely pressuring the competition and production of its new Cybertruck should start later this year. Buy, sell, or hold?

First-quarter results to 31 March

• Revenue up 24% $23.33 billion
• Adjusted earnings per share down 21% to $0.85
• Cash and investments held up 24% to $22.4 billion

Guidance:

• Continues to expect full-year deliveries of between 1.8-2 million

ii round-up:

Electric car maker Tesla Inc (NASDAQ:TSLA) detailed a one-fifth fall in earnings year-over-year as elevated cost inflation and an underutilization of its new factories squeezed profit margins. 

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Total sales including its energy generation and storage business rose 24% from the year ago quarter to $23.33 billion, but with the adjusted autos related profit margin of 19% missing Wall Street forecasts of 22%. 

Tesla shares fell 5% in after-hours US trading having come into this latest news up by more than 60% year-to-date and following a similar fall during 2022. Both Volkswagen AG (XETRA:VOW) and Ford Motor Co (NYSE:F) are up by around 4% so far in 2023, while the S&P 500 has gained 8%.

Tesla repeated its expectation for vehicle deliveries over the full year to come in at between 1.8 and 2 million, a potential increase of over 50% from 2022 and following its move late last year to begin cutting vehicle prices.

Higher costs impeding the profit margin during the quarter included higher raw material prices, increased vehicle warranty costs and a ramp-up in production of  its improved vehicle 4680 battery. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results.

Tesla’s second-quarter production update is likely to be released early July. 

ii view:

Started in 2003, Tesla today makes both electric vehicles and energy generation and storage systems. As well as increasing its vehicle deliveries by 40% during 2022 to 1.31 million, energy storage products also hit a record 6.5 gigawatt during the year, while solar products came in at 348 megawatt, their highest since 2017. Producing vehicles across four factories including its new European plant in Germany, Tesla has a stock market value of over $560 billion compared to Mercedes-Benz Group AG (XETRA:MBG) and Volkswagen each at under $90 billion.

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For investors, increasing all-electric and hybrid vehicle competition from rivals such as Ford and General Motors Co (NYSE:GM) cannot be ignored. The economic outlook remains uncertain, higher costs such as raw materials affecting margins, while the full environmental impact of battery production remains open to debate. Tesla’s estimated price-to-Net Asset Value (NAV) of over 10 times also contrasts with estimates at under two times for many of its rivals, suggesting the shares are not cheap.

More favourably, growth in production is helping fuel a rise in revenue. Cuts to its vehicle prices and a concentration on volumes over profit is likely pressuring its rivals, development of vehicle software and network of supercharging stations continues, while sales of its energy generation and storage business have risen an impressive 148% to $1.53 billion. 

On balance, and while some caution is always sensible, electric vehicles have become increasingly popular, and Tesla's strategy appears to be working as sales and ownership increase.  An analyst consensus fair value of $210 per share certainly implies confidence among experts.

Positives: 

• Increasing production
• Climate change concerns are growing globally

Negatives:

• Rising competition from other manufacturers
• Elevated costs

The average rating of stock market analysts:

Strong hold