Tesla Inc (TSLA) USD0.001
HL comment (27 April 2021)
Tesla reported first quarter revenues of $10.4bn, marginally ahead of market expectations and up 74% year-on-year. That was driven by a 109% increase in deliveries, as the group ramped up production from its new Chinese factory. This was partially offset by an 83% decline in higher priced Model S/X vehicles, as Tesla shifted its factories to production of newer models.
Despite the shift in sales, operating margins of 5.7% were up on both the same period last year (4.7%) and the preceding quarter (5.4%). That's despite a 13% decline in average sales price and reflects lower average manufacturing costs. The combination of increased revenue and higher margins meant earnings per share rose 1850% to $0.39, although that remains some way behind analyst expectations.
The share price fell 1.7% in aftermarket trading.
2020 was a landmark year for Tesla - marking its 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.
A 76% year-on-year increase in Model 3 and Model Y production in the first quarter of 2021, and 140% increase in deliveries, managed to completely offset the margin headwind, from lower sales of premium Model S and Model X cars. That's a major achievement. 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 in 2020 pales in comparison to VW's 5.3m, 212,000 of which are electric cars.
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 2020 "installed capacity" was 1,050,000, but production's running well below that. Together with recent vehicle price cuts that suggests demand for Teslas might not be growing quite as fast as the group would like.
At the moment 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 in 2020. 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. Credit 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.
This cuts to our core concern with Tesla. The group's valuation, which at $709bn and a PE ratio of 151.8 makes it by far the most valuable automotive company in the world, is predicated on massive growth. But the economic outlook is uncertain 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. Add to that market wide shortages in vital computer chip components and the ramp up isn't without its challenges.
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.
We would be remiss not to also mention that Tesla has taken a big bet on Bitcoin this quarter, investing $1.5bn in the cryptocurrency. Investors could argue that if they wanted to have exposure to Bitcoin they would have bought some themselves. We seriously question the rationale for the purchase.
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 group's valuation has risen, so have expectations. 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: 151.8
- 10 year average Price/Earnings ratio: 66.5
- 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.
First Quarter Results
Automotive revenues in the quarter rose 75% to $9.0bn, with automotive gross margin of 26.5% up nearly a percentage point year-on-year. Revenue from automotive credits was $518m, excluding which automotive gross margins would have been 22%.
Capital expenditure rose 196% year-on-year to $1.3bn, as the group continued to ramp up Model Y production, develop its new German Gigafactory and the changeover to newer Model X and Model S variants. Together with a $1.2bn bitcoin purchase made during the quarter, that meant free cash flow in the quarter fell to $293m, down from $1.9bn last quarter, although improved year-on-year.
Net cash came in at $6.3bn, down from $7.7bn a quarter earlier - reflecting the purchase of bitcoin which is not treated as a cash-like asset for accounting purposes.
The group has not updated its long-term guidance, although delivery of Tesla Semis are expected in 2021.
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.
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