After the US stock market on Wednesday, April 19, electric vehicle giant Tesla announced its first quarter 2023 earnings.
Due to Tesla's sharp price cuts in major markets around the world during the reporting period, although revenue increased by more than 20% year-on-year, profit fell by more than 20% year-on-year, the gross profit margin of core automobile business fell to 21.1%, refreshing the lowest in at least two years, and the stock price fell by more than 4% after hours.
Before the release of the much-watched quarterly report, Tesla announced the news of the sixth price cut in the United States this year, and the price of "civilian best-selling models" such as Model 3 and Model Y was reduced by 4.7%-6%, making the lowest price of the rear-drive version of Model 3 officially fell below $40,000.
Tesla saw its first year-over-year EPS decline since the third quarter of 2019, with operating margin below expectations
According to the financial report, Tesla's revenue in the first quarter of this year was $23.33 billion, a year-on-year increase of 24%, basically in line with market expectations of $23.35 billion. Adjusted EPS of $0.85 was down 21% year-over-year, but also largely in line with expectations of $0.86.
Tesla's revenue fell 4% sequentially from a record high of $24.318 billion in the fourth quarter of last year, which is also the first year-on-year decline in adjusted EPS since the third quarter of 2019, both dragged down by the price cuts of global models in the first quarter, which rose 40% year-on-year.
The company's GAAP net profit in the first quarter was US$2.5 billion, below market expectations of US$2.6 billion, down 24% year-on-year; Non-GAAP net income was $2.93 billion, down 22% year-over-year, down nearly $1.2 billion from the fourth quarter of last year and $800 million less than a year ago.
Investors are most concerned about how price cuts affect gross margins. Tesla Motors gross margin in the first quarter was 21.1%, down from 25.9% in the fourth quarter of last year and 32.9% in the first quarter of last year. Automotive gross margin in the fourth quarter of last year was the lowest in two years.
First-quarter operating margin was 11.4%, down nearly 780 basis points year-over-year, compared to 16% in the fourth quarter of last year and 19.2% in the first quarter of last year. Originally, Tesla's measure of profitability was among the best in the automotive industry, reaching 16.8% last year, nearly three times that of traditional car companies.
Overall gross margin for the first quarter was 19.3%, down nearly 980 basis points year-over-year, compared to 23.8% in the fourth quarter of last year and 29.1% in the first quarter of last year, beating expectations of 21.2%. However, some analysts said that Tesla's gross margin level is still far ahead in the automotive industry.
Tesla said that "underutilized new factories" depressed margins, combined with higher raw materials, commodities, logistics and warranty costs, lower average selling prices of vehicles, higher production costs for 4680 batteries, and lower revenue from the sale of carbon credits to traditional automakers, all contributed to lower profitability than a year earlier.
By revenue, revenue from the company's core automotive business reached US$19.96 billion in the first quarter, up 18% year-over-year and down more than 6% sequentially. Energy revenue doubled to $1.53 billion, up 148% year-over-year. Energy storage system deployment increased by 360% to 3.9 GWh.
The Shanghai plant has been running at full capacity for months, and the Model Y is selling well in Europe and the United States, with free cash flow plummeting 80%
Tesla said in the financial report that the company's operating profit is at the forefront of the industry, the cost of the vehicles produced is decreasing, after the price reduction, the operating profit margin is still declining by a controllable amount, and the future does not rule out continuing to increase or reduce prices:
"Given the potential lifetime value of Tesla vehicles through autonomous driving, fast charging, connectivity, and services, the near-term pricing strategy takes into account long-term profitability per vehicle."
The electric pickup Cybertruck is on track to start production later in 2023. Continue to make progress in the development of next-generation platforms. The Shanghai plant has been running successfully close to full capacity for several months.
The Model Y was the best-selling model in Europe in the first quarter and the best-selling car without pickup trucks in the United States that quarter. The Company maintained its full-year vehicle production forecast of 1.8 million units, representing a compound annual growth rate of 50%, slightly lower than the market expectation of 1.84 million units.
Notably, Tesla's operating cash flow in the first quarter was $2.5 billion, and free cash flow after capital expenditures plunged 80% year-over-year to $440 million, far below market expectations of $3.24 billion, and free cash flow in the fourth quarter of last year was $1.42 billion.
Zerohedge, a financial blog known for its poisonous tongue, found that excluding sales revenue of $521 million in carbon credits, Tesla's overall gross margin fell below the 20% threshold for the first time since the new crown epidemic crash, and free cash flow in the first quarter will also be negative.
What should Tesla pay attention to in the earnings call?
Tesla warned in its quarterly report last year that it faced the impact of economic uncertainty and higher interest rates, and in the first quarter of this year, it repeatedly cut prices sharply in the United States, Europe, China and other Asian markets to attract buyers, making gross margin and profit trends the focus of earnings reports.
In the fourth-quarter earnings call in January, the company's chief financial officer Zachary Kirkhorn said that Tesla can maintain the gross margin of cars above 20% in 2023, investors want to know the specific evaluation of management's profit margin for the rest of the year, and many Wall Street analysts believe that the gross margin of automobiles will inevitably fall below the key threshold of 20% before the end of the year.
Since about 86% of Tesla's total revenue in the fourth quarter of last year came from car sales and the sale of carbon credits to traditional automakers, investors also want to understand order activity and demand after car price cuts. Musk said after a sharp price cut at the beginning of the year that "orders are almost twice the speed of production", as long as management confirms that "demand still exceeds supply" can effectively boost the stock price.
Other highlights include an update on the Cybertruck, an electric pickup truck scheduled to begin production this summer, an update on the third-generation vehicle platform revealed at Tesla's investor day last month, and more timelines for building the latest Gigafactory in Mexico. Management's interpretation of subsequent pricing strategies has also attracted attention, which look unpredictable and will increase prices in addition to price cuts this year.
Electrek, an electric vehicle website that has long tracked Tesla's dynamics, said that because the Cybertruck will not be mass-produced until next year, it should not have a substantial impact on Tesla's revenue in 2023. At a time when profit margins are falling, investors will want to get an update on Tesla's self-driving program, which has helped boost profit margins in the past. Perhaps Tesla will reveal more plans for the latest cheaper car.
In the first quarter, Tesla cut prices sharply in major markets such as the United States, China, and Europe
After six price cuts in Tesla's largest U.S. market this year, the price of its base Model 3 has been cut by 11 percent, the price of the base Model Y by 20 percent, and the overall U.S. model by up to 25 percent in response to weak demand, rising interest rates and growing competition for electric vehicle market share.
Musk said at the beginning of the year that "price is very important for the sale of electric vehicles" and that the price reduction is in the hope of having an impact on ordinary consumers, "our goal is to make Tesla cars as cheap as possible." Some analysts also pointed out that due to the tightening of the $7,500 full tax credit for applying for electric vehicles in the United States from this week, Tesla tried to respond to the reduced incentives by directly cutting prices.
According to media statistics, the base configuration prices of Model 3 and Model Y, Tesla's most popular models in the United States, have returned to the level of 2021, when the company's annual operating profit margin was 12.1%, and Tesla's operating profit margin in the first quarter is expected to fall back to around that level. Last year, Tesla's operating profit margin was as high as 16.8%, ranking among the highest in the automotive industry and nearly three times that of traditional car companies.
In China, Tesla's second largest market, after the withdrawal of "national supplement" in January this year, the company took the lead in launching the first shot of the "price war" of new energy vehicles, and the price of Model 3 and Model Y was reduced by 20,000 to 48,000 yuan, both of which were reduced by more than 10%, setting a record low in Tesla's Chinese price. Chinese mainland market has not yet participated in this month's Tesla global price reduction tide, but there are reports that Tesla may cut prices on Saturday, April 22, and the adjusted starting price of Model 3 will be as low as 186,900 yuan, and the starting price of Model Y will be reduced to 215,900 yuan.
Tesla produced more than it sold for at least two quarters, and Wall Street feared that there would be no demand without cutting prices
However, multiple rounds of strong price cuts around the world have not led to the same significant sales growth, or failed to meet Wall Street's high expectations.
In the first quarter of this year, Tesla produced more than 440,000 vehicles, delivered more than 422,000 vehicles, a year-on-year increase of 36%, and production and sales reached a new record high for the company, but deliveries increased by nearly 4% month-on-month, far lower than the 17.8% month-on-month growth in the fourth quarter of last year.
Moreover, Tesla's production in the first quarter of this year exceeded the delivery volume by nearly 18,000 vehicles, and the more expensive Model S and X models produced almost twice as much as it sold. This has investors worried that Tesla will not be able to sustain growth without further price cuts.
Musk had predicted that Tesla would deliver 1.8 million electric vehicles in 2023, and up to 2 million could be delivered. Deliveries of 1.8 million will represent about 37% more than in 2022, but only if "if the year goes well, there are no major supply chain disruptions or major problems."
In the fourth quarter of last year, Tesla delivered about 405,000 vehicles and delivered about 1.31 million vehicles for the year, both of which set record deliveries, but still fell short of market expectations and Tesla's target of 1.4 million vehicles. In the fourth quarter of last year, nearly 440,000 vehicles were produced, exceeding deliveries.
What did Wall Street think before the release of the first quarterly report?
JPMorgan analyst Ryan Brinkman worries that price cuts will drag down the profitability of Tesla and other electric car makers:
Lower prices are negative for Tesla overall, and less negative for traditional automakers like GM and Ford (given that they may currently temporarily lose more money on electric vehicles, but have other profits to offset those losses).
The most negative is for battery-only EV makers that compete with Tesla, such as Rivian, because they may also lose more money on electric vehicles and have no profits elsewhere to offset those losses.
Ahead of the earnings report, Evercore analysts wanted to know about second-quarter deliveries and any signs of an increase in the order backlog. Guggenheim analyst Ronald Jewsikow reported this week that Tesla's price cuts in the United States indicate a "slowdown in demand" for the electric car maker:
All of our demand trend studies show that demand is slowing into March, waiting times are significantly shorter across all models, and inventories are increasing.
With orders below supply in March, I doubt the price cuts in the US will be enough to boost sales, as the demand environment remains challenging and risks skewed to the downside.
Following Tesla's price cut in early April, we lowered our FY2023 revenue, EBITDA and EPS forecasts, but maintained our $105 price target on Tesla and reiterated our sell rating on Tesla stock.
Bernstein Research analyst Toni Sacconaghi Jr. said the fact that Tesla is cutting prices for its models with the longest lead times suggests that other price cuts may follow.
Morgan Stanley analyst Adam Jonas said that if prices continue to be cut, combined with the ripple effect of the banking crisis on consumers, intensified EV competition and slowing economic growth, Tesla's goal of at least 20% gross margin may be difficult to achieve in subsequent quarters.