Investors Look Past Tesla’s Impressive Results
Tesla did it again in the December quarter; they showed the auto industry how to run an EV business.
Dec. quarter deliveries were up 71% y/y while the top five automakers were down 3%. This delivery gap has become a predicable trend over the last couple of years. The critical gross margin ex-credit metric was a record 29.2%, up from 28.8% in September and 25.8% in June. That’s about 4.5x greater profitability than the industry average.
There was a lot to like about the quarter, along with Musk’s outlook calling for 2022 deliveries to be ahead of Street expectations. You wouldn’t know it looking at an investors’ reaction —shares are down 10% as of this writing — which begs the question: Why are investors looking past Tesla’s impressive results?
Tech investors are on edge
The Dec. results come when the investment pendulum has swung from fear of missing out in 2021 to fear of getting run over in 2022. Tesla is in good company with other tech giants, including Microsoft and Apple, who reported solid quarters along with favorable outlooks only for their shares to be up slightly on the impressive news. The bar is high for these companies.
The Fed effect, which is sowing uncertainty around the pace and slope of rising interest rates, is likely at the core of these investor jitters. That said, it’s one thing for a company not to get full credit for its financial progress, it’s another for shares to be punished on a good report.
Themes matter in the near-term, fundamentals in the long-term
The drop in shares of Tesla triggered similar percentage declines in shares of Rivian and Lucid. This dynamic is a sign of a shift in thematic investing. Every year has a class of investing themes that typically don’t repeat in the subsequent year. 2021 was about big EV companies and traditional auto stepping into the EV game. As a recap of 2021: Tesla, Rivian, and Lucid were up 220% (including data from the last private rounds).
On the traditional OEM side, Ford shares were up 143%, followed by both GM and Volkswagen up 44%. That kind of outperformance is not sustainable, especially given that Rivian and Lucid are moving from story stocks to show-me stocks. We expect 2022 to be a challenging year for Rivian and Lucid when it comes to ramping deliveries in a tight supply chain environment. If these challenges play out, the EV theme may see continued pressure.
Long-term fundamentals matter. Tesla is profitable with impressive growth targeting large addressable markets. When you put it together, we believe that growth can continue. Musk talks about a 50% average growth rate over the next decade. That means 60+% in the near-term, declining to 30% growth in the out years. But Musk tends to over-promise. Even still, given their product roadmap, production ramp, and macro EV tailwinds, we expect Tesla’s industry-leading delivery growth rates to continue. In the meantime, shares of TSLA will be a rollercoaster as investors look to gain confidence that the good times at Tesla are just beginning.
Key takeaways from December
- Tesla expects growth to continue. Elon Musk said on the earnings call that he expects growth to be “comfortably above” 50% for deliveries in 2022 while the Street predicted 40-45% growth. The Street expects 1.35M deliveries in 2022. Elon’s guidance of 55+% growth would yield 1.45M deliveries. We believe that — given the success Tesla had in 2021 in navigating the supply chain, along with continued strong demand — a 55+% growth rate in 2022 is achievable. As a point of reference, the company grew deliveries by 87% in 2021.
- Positive FCF margin. Despite increased capital expenditures, Tesla’s operating cash flow remained strong hitting $2.8B in the Dec. quarter, with cash increasing sequentially to $17.6B.
Clarifying the product roadmap
- FSD by year-end? While the FSD beta roll-out has been controversial, Musk reiterated his belief that FSD will near full release by the end of 2022 and will eventually “cost less than the subsidized value of a bus ticket.” We believe it’s highly unlikely that it’ll be consumer-ready this year but Musk’s commentary suggests that the software is making more progress than most believe. He indicated that significant improvements in the FSD stack will be made public within the next few months. Whether FSD arrives in 2022, 2023, or 2024 doesn’t make a significant difference — when it does, it’ll expand the companies margins and potentially TSLA’s multiple.
- Optimus Subprime gets airtime, doesn’t matter for at least 4 years. Tesla revealed plans to build a humanoid robot at Tesla AI Day in August 2021. On the earnings call, Musk arguably focused too much on the bot opportunity. Most notably, he said that Optimus has “the potential to be more significant than the vehicle business.” While that comment may prove to be true, it’s a long way out. Tesla aims to bring Optimus to production in 2023, which roughly implies the first usage case in Tesla factories in 2024 and general availability to follow in 2026.
- 4680 production around the corner. The yet-to-be-released 4680 battery architecture is a step function in energy density. That means vehicle range will increase by about 16% while the cost of that range — and potentially the cost of the vehicle itself — will decrease. This will be a selling point compared to other EVs that are based on previous generation cell architectures. Based on comments from the earnings call, we should expect Model Ys equipped with 4680 cells to be produced out of Giga Texas starting in the June quarter of this year. Separately, it appears the new cells will have a slow rollout, with no current plans of Giga Berlin to equip its production with 4680.
- Tesla Insurance. Tesla currently offers insurance in five states. This year, Tesla will continue with their slow state-by-state rollout. Elon also emphasized the financial benefit of their program which rewards safe driving by lowering insurance rates in accordance with a driver’s safety score. Insurance is not flashy, but it’s costly. By Tesla lowering the cost of insurance, they are lowering the cost of car ownership which should translate to vehicle sales.
- While Model 2 is not on the product roadmap today, it eventually will be. Musk made it clear the company is not currently developing a $25K car because they can’t keep up with demand for $49k cars. That logic to shelve any development of Model 2 for the near term makes sense given the mere talk of an upcoming lower-priced option could have a negative impact on Model 3 and Model Y sales.