Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Tesla - trading ahead of expectations

First quarter revenue rose 81% to $18.8bn, well beyond market expectations.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

First quarter revenue rose 81% to $18.8bn, well beyond market expectations. That reflected an 87% increase in Automotive revenue to $16.9bn and a 31% increase in regulatory credits.

Operating profit rose from $594m to $3.6bn. A 68% increase in vehicle deliveries as well as higher average selling prices were behind the surge, with regulatory credit sales and the benefits of scale also helping. This more than offset the impact of inflationary headwinds.

The group continues to operate below capacity primarily due to supply chain issues which are likely to persist through the rest of the year. Still, the group expects to see 50% growth in vehicle production this year, with ''a reasonable shot at a 60% increase.''

Shares were up 4.1% in following the announcement.

View the latest Tesla share price and how to deal

Our View

Tesla's giving us all a lesson in economies of scale. The automaker's seen production rise considerably, which has lowered per-unit costs and driven margins to 19% - unheard of in the auto sector. We're genuinely impressed with how far the group's come with regulatory credits no longer supporting the underlying business.

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. That's the crux of Tesla's business right now and it's working well. Shutdowns in Shanghai and the ramp up of new factories in Texas and Berlin are likely to filter through and weigh on margins in the upcoming quarter, but these headwinds should be temporary. That means operating margins in the high-double digits are likely sustainable if demand for the cars keeps up.

This doesn't appear to be a problem even as the group raises price to combat cost inflation. The waitlists for new cars are still lengthy. But affordability is still part of the equation. Inflation's causing a cost-of-living squeeze around the world and the impact on consumer behaviour hasn't been fully realised yet. Not to mention we may not have seen inflation peak yet, so there could be more pain ahead.

There's no denying Tesla's solid position in the electric vehicle space, and its clear EVs will take over the roads in the future. This structural tailwind will benefit Tesla for years to come, but that's not enough alone to justify the group's eyewatering valuation.

We're pleased to see that Tesla's already thinking about next steps to maintain its status as an industry disruptor. Software is one such potential outlet - 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 growth avenue is insurance. It's still early days but Tesla is already seeing green shoots here. 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.

It will be a long time before any of these initiatives can meaningfully move the needle, but as more carmakers throw their hats in the EV ring Tesla needs to consider its next steps. Tesla's valuation is lofty to say the least, and with margins more than double many of its competitors, some of this is warranted.

But Tesla is priced as a hyper-growth disrupter, not a car company. With that comes a lot of risk. Investors have to believe that a self-driving robotaxi and human-like robot are viable business options. Elon Musk is nothing if not eccentric, so his aspirations for the future tend to be larger than life. That creates a lot of near-term volatility because missteps and disappointment along the way are pretty much guaranteed.

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.

First Quarter Results

Vehicle production rose 69%, with Model 3/Y production up 61% and Model S/X production up from 0 to 14,218. Model S/X deliveries rose from 2,030 to 14,724. Model 3/Y deliveries were up 62% to 295,324.

Operating expenses rose 15% to $1.9bn.

Gigafactories in both Berlin and Texas began to deliver Model Y vehicles during the period. Covid outbreaks in Shanghai meant the Gigafactory there was temporarily shutdown, though limited production recently restarted. This will filter through to have a negative impact on margins in the second quarter.

Services and Other, which houses the group's insurance business, approached breakeven in the period. Car sales continue to be the focus for Tesla, but over time the group expects software-related profits to make up a greater proportion of total profits.

Car sales continue to be the focus for Tesla, but over time the group expects software-related profits to make up a greater proportion of profits.

Free cash flow was $2.2bn, up from $293m last year. The group finished the quarter with net cash of $13.2bn, up from $10.9bn at the end of last year.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 21st April 2022