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Tesla - Q4 beats expectations

Laura Hoy, Equity Analyst | 28 January 2022 | A A A
Tesla - Q4 beats expectations

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Tesla Inc USD0.001

Sell: 927.43 | Buy: 927.84 | Change 27.87 (3.10%)
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Fourth quarter revenue rose 65% to $17.7bn, above market expectations, reflecting a 71% increase in Automotive revenue to $16.0bn.

Operating profits rose from $575m in 2020 to $2.6bn, despite a $245m share-based award for CEO Elon Musk. The increase reflected higher deliveries with lower per-vehicles costs as well as improved profitability in leasing, Service & Other.

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Our View

Tesla's enjoying the benefits of a huge uplift in production. More cars rattling through the production line lowers per-unit costs, so margins and profits can come for the ride.

Increases in Model 3 and Model Y deliveries has more than offset the headwind from lower sales of premium Model S and Model X cars.

But Tesla has more work to do. It's 500,000 cars in 2020 pales in comparison to VW's 5.3m, 212,000 of which are electric cars.

Its answer is a huge factory building programme. The German factory is due imminently, though local permits are holding up the process, while the Texas plant has finally started making vehicles after a series of setbacks. Various headwinds, such as labour shortages and disruption at ports have kept existing factories from reaching full capacity. This is expected to persist in the coming year, so new facilities can't come soon enough.

We're also seeing declines in the value of regulatory credits the group receives. Tesla earns credits in recognition of its zero-emission vehicles and sells them to other manufacturers who need to offset their emissions. In the past Tesla has earned more credits as more vehicles have hit the road. These credits have been a valuable source of cash flow, but as rivals increase their electric vehicle output Tesla's credits have become less valuable. A few years ago the decline would have been a catastrophe, but it can now shrug off the credit decline with ease.

However, for all the progress the group has made, our core concern with Tesla remains unchanged. The group's valuation, which at $832bn and a PE ratio over 80 makes it by far the largest company in the world, is predicated on massive growth. But rivals are pouring billions into closing the technological gap, and competition in China is already hotting up. Seizing the necessary share of the electric vehicle market, and at sufficient margin to justify that kind of multiple, is a big ask.

Longer term Tesla hopes to reduce costs and increase its competitiveness 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. 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 and there are no guarantees.

In its core business Tesla has enjoyed a period of technological superiority, with a great brand and perhaps most importantly a great investment story. However, as the valuation has risen, so have expectations. Meeting those will be no easy feat.

Tesla key facts

  • Price/Earnings ratio: 81.5
  • 10 year average Price/Earnings ratio: 77.2
  • 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.

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Fourth quarter results

Operating expenses rose 50% to $2.2bn, reflecting the cost of getting new factories up and running.

Supply chain and labour issues meant factories were unable to run at full capacity during the period, an issue that's expected to persist in 2022.

Vehicle production rose 70% to 305,840 while deliveries increased 71% to 308,650. Increased demand for Model 3/Y vehicles offset a 38% decline in Model S/X deliveries.

The new Gigafactory in Texas began building Model Y vehicles in late 2021 and the German Gigafactory is still in the process of obtaining a manufacturing permit.

While the new factories come online, the group expects to extend capacity at the Fremont factory to beyond 600,000 per year.

Free cash flow was $2.8bn, up from $1.9bn a year ago. The group finished the quarter with net cash of $10.9bn, up from $7.7bn last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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