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Tesla - weaker outlook amid consumer challenges

Tesla's fourth-quarter automotive revenues rose 1% to $21.6bn, with growth partly held back by lower prices...

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Tesla's fourth-quarter automotive revenues rose 1% to $21.6bn, with growth partly held back by lower prices. Total production rose 13%, while deliveries were up 20%. There was double-digit growth in the much smaller energy generation and storage, and services revenue divisions.

The slower revenue growth and higher costs meant operating profit fell 47% to $2.1bn.

Tesla generated $2.1bn in free cash flow in the quarter and had net cash of $23.9bn at the end of 2023.

Elon Musk has warned that sales growth would be "notably lower" in the new financial year, amid weaker consumer demand. The company is also preparing to start production of a new lower-cost car.

Tesla shares fell 8.0% in pre-market trading.

View the latest Tesla share price and how to deal

Our view

Tesla has had another disappointing quarter. Problems surrounding profitability continue to bite.

The higher interest rate environment is affecting consumers and leading to price cuts, and big investment into software and AI means margins are under huge pressure. Exactly where margins will settle is still a source of debate and largely depends on both pricing, and the group's ability to improve production efficiency.

Getting prices back into healthier territory is likely to be a tough ask while wider conditions remain difficult. At the same time, competition, especially in China, is also incredibly tough. EVs from formidable rivals like BYD are available at considerably lower price points than Tesla, which could see revenue growth stall in this important growth region.

Traditional car makers are throwing billions at producing their own electric vehicles too. Tracking the strength of Tesla's demand is important because Tesla's 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 likely 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.

Tesla bulls are of the mind that it doesn't matter if initial margins achieved on cars are low, because these types of extras mean the potential revenue per vehicle in the long run far surpasses the initial selling cost. We happen to like this as a theory but would like some hardened proof of the adoption of these services at scale. The extensive levels of net cash sitting on the balance sheet mean the group can stomach ups and downs, but investors will want to see profit progress sooner rather than later.

Concerns also involve governance risk. Musk is famously unconventional, as great innovators often are. But this has now landed him in trouble. He's faced 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 if production can be ramped up at pace, the horizon for more attractive per-unit costs looks rosy. There's no denying Tesla's remaining appeal, but the market is unlikely to fully replenish the group's valuation until margins are pointing north. That's going to be challenge while the outlook for volumes looks shaky.

Environmental, social and governance (ESG) risk

Most of the auto industry falls into the medium-risk category in terms of ESG. Product governance, particularly around safety, and carbon emissions from products and services are key risk drivers. Business ethics, labour relations and direct carbon emissions are also contributors to ESG risk.

According to Sustainalytics, Tesla's management of ESG risks is average. It is recognised as working towards lowering carbon emissions by reducing the prevalence of traditional car engines. However, its product governance and human capital management are deemed problematic. Issues include safety concerns around its autopilot technology and the management of its workforce. Governance concerns also include Elon Musk's past tweets which impacted Tesla's share price.

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: 25th January 2024