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Tesla - demand holding up as operating profits climb

Fourth quarter revenue rose 37% to $24.3bn, a record for the group. Automotive revenues were up by a third to $21.3bn...

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Fourth quarter revenue rose 37% to $24.3bn, a record for the group. Automotive revenues were up by a third to $21.3bn. There was a 44% increase in production, with Model 3/Ys making up the vast majority of the total. The group said it's planning to grow production 'as quickly as possible' to reach the 50% growth target (on a compound growth basis). For the new financial year Tesla expects to produce around 1.8m cars. Total vehicle deliveries were up 31% to 405,278.

The group said demand is strong at the moment, with orders far outstripping production.

Tesla's average selling price (ASP) increased compared to last year, reflecting a more lucrative mix of cars being sold. This helped offset higher costs, which fed into a 49% increase in operating profit to $3.9bn. Despite the increase in profits, margins were tighter overall reflecting higher costs and recent price cuts. The group highlighted the uncertain economic backdrop and highlighted its ASPs have halved since 2017.

The group highlighted plans to cut costs, especially around materials and parts in some of its older models. This comes as Elon Musk said a difficult recession is likely this year.

Tesla generated free cash flow of $7.6bn for the financial year as a whole.

The shares rose 5.5% in after-hours trading.

View the latest Tesla share price and how to deal

Our View

Tesla continues to prosper in times of economic uncertainty.

The group's valuation has risen so far this year but its only a short time frame. That reflects optimism from China reopening, which helps Tesla's production ramp back up - which allows profits to feel the benefit of economies of scale. Most telling is the fact Tesla orders are far outstripping production, suggesting demand is strong, despite the gloomy economic outlook.

With that said, we're mindful that Tesla has never been tested in times of recession. With the depth of the incoming economic crisis not yet known, we have reservations. Tesla has outlined plans to slash input costs on some of its older models and reduce prices in order to keep demand high. These are both sensible moves. But with Tesla unlikely to ever be a cheap car option, we do wonder what the implications for margins will be if Tesla has to cut prices too far, or if enough customers fail to materialise.

Traditional car makers are throwing billions at producing their own electric vehicles too, meaning competition is something to consider over the long term. And the very important Chinese market is home to some formidable rivals, including the likes of BYD. Tracking the strength of Tesla's demand is important because Tesla's gigantic Gigafactories are expensive to ramp up, but once their costs have been covered, a greater proportion of each car sold drops through to profits. If volumes were to drop, the opposite would be true.

Software is a potential outlet for extra growth - the group's self-driving technology is already delivered to existing vehicles through wireless updates. This lends itself well to software subscription programmes, which would help pad profits and squeeze more out of cars already sold.

Another potential avenue is insurance. It's still early days but Tesla is already seeing green shoots. Driver data is used to set premiums. This creates an instant feedback loop, ultimately encouraging safer driving. Tesla is responsible for fewer accident costs and customers save money. Further afield are aspirations for a fully self-driving robotaxi.

The final word should go to governance risk. Musk is famously unconventional, as great innovators often are. But this has now landed him in trouble. Market sentiment was badly damaged after his Twitter takeover, as Tesla shareholders question if he could run both companies. He's currently in court on fraud charges because of old tweets. Tesla investors need to be aware there could be further ups and downs in their investment caused by Musk's behaviour.

Tesla has an excellent product and current demand is robust. But there are obstacles. Tesla needs to keep its pedal on the floor if it wants to hit its target of 50% average delivery growth. Failure to do so could see further pressure heaped on a valuation that's come under significant pressure in the last 12 months.

Tesla key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th January 2023