Teslareported fourth quarter revenues of $10.7bn, up 46% year-on-year and marginally ahead of market expectations. That was driven by a 61% increase in total deliveries, which hit 180,667, partially offset by a shift from higher priced Model S/X vehicles to more affordable Model 3/Ys.
The shift to lower priced vehicles meant operating margins fell from 9.2% last quarter to 5.4% in Q4, but still improved year-on-year. As a result underlying earnings per share were behind market expectations, despite nearly doubling year-on-year to $0.80 per share.
Tesla shares fell 5.1% in aftermarket trading.
2020 was a landmark year for Tesla - marking it's first year in profit and its entry into the S&P 500 index of top US companies. However, the hard work is not over. The group is now in a rush for scale as it looks to sustain profits in the face of increasing competition.
The massive step up in sales has been driven by a switch to lower prices on some products and a general shift towards the lower priced Model 3 and Model Y. That's not done wonders for profit margins. Manufacturing "mass market" cars is all about scale - manufacturing extra cars through the same fixed cost factories - and Tesla isn't yet a scale manufacturer. It's 500,000 cars a year pales in comparison to VW's 5.3m, 212,000 of which are electric cars.
At present Tesla is able to get away with a sub-scale manufacturing operation thanks to sales of regulatory credits. Credits equated to over 200% of reported profits this year. Tesla earns credits in recognition of its zero-emission vehicles and sells them to other manufacturers who need to offset their emissions. Broadly speaking, as more Teslas hit the road, the group earns more credits.
However, as rivals increase their electric vehicle output those credits will become less valuable. Credits revenues are essentially all profit and provide a valuable cash boost now. That will likely continue in the near term, but they're not a long term lever for the business. Ultimately Tesla needs the core automotive manufacturing business to stand on its own two feet.
That's where Tesla's huge factory building programme comes in, with new factories popping up on an annual basis. However, Tesla's "if we build it, they will come" approach is a concern for us.
The group's "installed capacity" at the time of full year results was 1,050,000, but the group's running less than 50% of that. Together with recent vehicle price cuts that suggests demand for Teslas might not be growing quite as fast as the group would like.
This cuts to our core concern with Tesla. The group's valuation, which at $819bn and a PE ratio of 203.4 makes it the most valuable automotive company in the world, is predicated on massive growth. But the economic outlook is gloomy and with even the 'affordable' Model 3 priced at a fairly hefty £40,000+, it's hardly an ideal time to be asking drivers to reach for their credit cards. Meanwhile rivals are pouring billions into closing the technological gap (VW alone is looking to spend $86bn on electric cars over 5 years).
Tesla's answer is to reduce cost via increased vertical integration - including manufacturing its own battery components - with the aim of ultimately manufacturing a profitable $25,000 car. The group is also banking on its self-driving technology - installing "Full Self-Driving" into cars in October, with "hundreds of thousands" of its cars able to drive themselves this year. Both do have the potential to change the competitive calculus for Tesla, but the company has made big claims before that took far longer than anticipated to deliver.
Tesla has enjoyed a period of technological superiority, with a great brand and perhaps most importantly a great investment story. However, as the group's valuation has got higher, expectations have become even more formidable. Meeting those expectations will be no easy feat - and the market would likely punish the shares harshly for failure.
Tesla key facts
- Price/Earnings ratio: 203.4
- 10 year average Price/Earnings ratio: 62.2
- Prospective dividend yield (next 12 months): 0.0%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results
Full year total revenue reached $31.5bn, of which $27.2bn was from automotive sales. The remainder reflects rapid growth in other parts of the business, particularly storage and solar.
Automotive gross margins rose 4.37 percentage points compared to 2019 to 25.6%. However, excluding the sale of regulatory credits of $1.6bn, automotive margins in the quarter actually fell from 20.9% a year ago to 20.7%.
Free cash flow in the quarter rose 84% to $1.9bn, boosted by regulatory credit sales, and together with $5bn of new shares, saw the group move from net debt of $7.2bn a year ago to $7.7bn net cash.
The balance sheet improvement is despite a 179.4% increase in capital expenditure during the quarter - which came in at $1.2bn as the group continued to build and expand factories around the world. The group expects to begin deliveries from Gigafactory Berlin and Gigfactory Texas in 2021, with further expansion of Shanghai over the year. Tesla Semi deliveries are expected to begin in 2021.
Tesla has significantly reduced the detail of the guidance it provides, and now aims to deliver 50% annual growth in vehicle deliveries "over a multi-year horizon" subject to capacity and efficiency. The group expects its operating profit margin to increase over time - eventually reaching industry leading levels.
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