BYDDY - Tesla: Headwinds In 2024

2024-01-16 12:16:31 ET

Summary

• 2024 could be a tough year for Tesla, Inc. due to the loss of tax credits, demand issues, and cost pressures.
• In the U.S., Tesla loses IRA subsidies on Model 3 SR and LR. Used Tesla values continue to nosedive, while many workers are getting large raises.
• In China, Tesla's market share continues to decrease, and Giga Shanghai faces a higher 25% tax rate this year.
• In Europe, the loss of EV subsidies in Germany and France may pressure Tesla's volume growth, while union pressures are pushing up the company's wages in Berlin.
• I do not believe the Cybertruck or many other flashy initiatives from Tesla will help hold up the share price as they have in the past.

In early 2023, I predicted Tesla, Inc.'s ( TSLA ) drastic price cuts signaled demand problems and that the impact on margins would be severe, and that Tesla's 2023 earnings would not exceed 2022's. Tesla reports Q4 2023 earnings post-market on January 24th.

Indeed, it looks like 2023's EPS is on track to come in at the low $3 range, below 2022's $4.07 in diluted non-GAAP earnings, despite the addition of a major new tax credit in the U.S.

2024 could be shaping up to be worse than 2023, as Tesla is losing tax credits in certain geographies and running into further demand issues. I believe investors are starting to pick up on this, which is why Tesla's share price has been under pressure despite beating 2023 delivery estimates.

Many expect Tesla to deliver 2.2 million cars in FY24, a deceleration from prior years' growth, but still an impressive amount of incremental volume. I believe they will have a difficult time achieving that goal, and that 2024 earnings will drop below 2023 levels.

Tesla 2024 U.S. Sales

Tesla increased U.S. Sales 28.6%, from 517,374 in 2022 to 665,137 in 2023, driven by both price cuts and IRA credits. But considering a range of headwinds, I would be surprised if Tesla's U.S. sales did not fall in 2024 absent another round of major price cuts.

1. Competition

Competition has been slow in the U.S., and Tesla still has a dominant market share, but 2023 showed that competitors are starting to make inroads into the electric vehicle ("EV") market.

2. Tesla Used Car Values

Tesla Used Car Values are in an absolute free fall, and this should concern Tesla investors. As Tesla is, in my opinion, well beyond the "supply-constrained" point, aftermarket values become far more important. This will impact both new car sales and lease residuals.

The Hertz Global Holdings, Inc. ( HTZ ) decision to sell 20,000 EVs , 1/3 of its electric fleet, should not have been a big surprise to anyone that listened to their Q3 Conference call , where they disclosed what I considered to be the real negatives: that maintenance cost and repair cost for EVs is higher than traditional gas-powered cars. This goes against many of the traditional narratives around EV ownership.

The other major concern for used buyers, in my opinion, is battery life. The average age of a light vehicle operating today in the U.S. is over 12 years old. While the innovators and early adopters may be willing to test the waters with EV batteries, it seems that many in the middle market may not be willing to.

3. Subsidy Loss

While 2023 featured new EV subsidies in the U.S., 2024 is going the other way, as Tesla has lost the IRA credit for the Model 3 SR and Model 3 LR. Many buyers may switch to the Model Y because of this, but this is a negative and may have pulled forward some level of sales from 2024 into 2023.

4. Pricing

While there have been no official Tesla price cuts in the U.S., as of this writing, almost every inventory of Tesla is 10% off or more (I searched more than a dozen popular zip codes.)

5. Labor Costs

At the same time, Tesla is facing pricing pressure across its lineup, wage pressures are starting to mount.

• Gigafactory Nevada workers are receiving a 10% or more wage hike.
• Fremont California workers are also getting a raise in an effort to fight unionization.

While increasing labor costs are a reality for most businesses, these become more problematic when pricing is going backwards. I believe Tesla has been able to hold the line somewhat on cash compensation because of their employee stock programs, but these become far less attractive when the share price is stagnant to down.

China

China has been the brightest spot for Tesla sales growth in 2023, but they face intense competition from local competitors.

1. Price

In China, Tesla recently cut prices across the board. For the Model Y, this solidifies a "stealth" price cut in the form of an insurance subsidy that ended in 2023. The Model 3 cut is a new cut, but makes logical sense as this widens the price gap between the M3 SR and MY SR.

2. Competition

Tesla grew significantly in China on the back of a growing market and price cuts, selling 603,664 units, up 37% (439,770 units) from 2022. But far from a market leader in China, Tesla is being drastically outsold by BYD Company Limited ( BYDDF ).

Tesla's market share continues to drift lower, ending the year at 7.8%.

I believe Tesla will continue to grow China's unit volume in 2024, but it may be at the expense of margins.

3. China Taxes

Tesla's income taxes in China will reset to 25% (from 15%) in 2024 after the expiration of a special beneficial tax rate. This is covered in the Tesla 2022 10-K .

Remember this factory produces half of Tesla's worldwide sales.

Europe

Sales in Europe increased 55.7% in 2023 , driven by price cuts and increased subsidies in many countries. I think any increase in 2024 will be much more difficult for Tesla.

1. Subsidies

Germany, the 4th largest world economy, ended EV subsidies entirely because of budget pressures. France also removed Model 3 subsidies because they are not produced in the EU.

Tesla did well in Europe this year, but there are concerns looking forward to 2024

• Germany sold the most Teslas in the EU in 2023 at 63,682, but this was a deceleration from 2022's 69,963 sold. What do we think they sell in 2024 with no subsidies?
• France had the largest gains in 2023, selling 63,042 units, up from 29,198 in 2022. France sold the most Model 3 of anywhere in Europe at 24,539 units.
• The UK market declined YoY in 2023.

Tesla recently paused production in Berlin, allegedly as a result of Red Sea disruptions. While possible, I believe that this may be an excuse for having too much inventory.

I think it's likely that Germany, France, and the UK move backwards in 2024. I think it's also possible that 2023 marks the high for many countries like Denmark and Sweden, that are far smaller economies than places like Germany (Denmark has a GDP Of $398 Billion compared to $4.26 Trillion for Germany.)

2. Labor Costs

Tesla is also facing labor cost issues in Germany, with a series of pay raises and special bonuses for German workers in another attempt to push back against unionization efforts.

Tesla's Bullish Catalysts?

Many Tesla bulls claim that Tesla is "more than just a car company" due to its futuristic promises and prognostications. That, along with promised growth, is why shares trade well over a 50+ NTM P/E, while most automakers trade in the single digits.

I largely disagree and believe Tesla is mostly a car company, with fantastic Marketing selling the high-tech aspect of its business.

Cybertruck AWD

After a short, initial surge, I believe the market for this $80,000, 7,000-pound EV Truck will be limited and similar to Model S/X. I think this product has limited practical utility as a truck (towing and hauling kill range for both EV and gas cars) and it has the most appeal just as a flashy new model.

I wonder how many buyers will think they're doing some positive for the environment by purchasing a 7,000-pound car that rides on a 20" LT285/65R20 tire.

I've seen some claim that this car will have a "Halo effect" that, just by this product existing, will sell more other Tesla cars. I disagree with this.

Full Self-Driving ("FSD")

FSD is a bit behind schedule and still offering Level 2 driving. While Autopilot and FSD still are making gradual, incremental improvements, so are competitors' driver assist packages.

My opinion as a technologist is that Tesla contains no special sauce for solving this. Tesla seems to continue exciting investors with flashy Dojo supercomputers and things like this, but I believe this is little more than clever marketing. Other people can tie together NVIDIA Corporation (NVDA) GPU clusters, too.

Model 3 Highland U.S. launch

Reviewing the list of improvements in the Highland seems on par with the normal improvements most automakers make in long-running models every few years. While enthusiasts may have value for these, the mass market generally ignores this sort of incremental refinement that all manufacturers do. Even with the Highland, I believe 2024 U.S. Model 3 sales will be below 2023 levels due to the subsidy loss.

Tesla Energy

I don't believe this business will ever be a growth driver, similar to Tesla Solar. Wiring up batteries made by other companies and then selling them to utility-scale customers that don't care about your brand like a consumer does is destined to be a low margin business.

Not to mention that requiring expensive battery storage highlights the true cost of Wind/Solar, which is not competitive with traditional power sources without subsidies.

Conclusion

Tesla seems to have prioritized volume growth over earnings and cash flow growth in 2023. I think both will be pressured in 2024 by decreasing subsidies, increased competition, and increased costs.

Especially in the U.S., I think Tesla will have a tough year in 2024, as they have lost the IRA credit for Model 3, and we are a year into the new IRA tax credit. My personal view is that Tesla is no longer the aspirational brand it once was. The M3 and MY are no longer flashy, new, or unique, but rather utilitarian EV choices. There are plenty of these on the road now. I'd guess that 20% of my recent Uber rides have been in a Tesla - hardly a hallmark for a luxury vehicle.

In China and the EU, Tesla's models are also aging while competitors introduce newer offerings at additional price points. Even many Tesla bulls are beginning to concede this.

2024 could be the year that Tesla, Inc. will no longer be able to drive big additional volume through price cuts, and their sky-high earnings multiple could come under pressure if that happens.

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