TSLA - Tesla: Missed Q4 Deliveries Could Force Analysts To Panic

Summary

• Tesla Q4 deliveries were nearly 4% below the consensus estimates. However, given all the negative commentary recently, did you expect Tesla to outperform?
• With TSLA down nearly 65% in 2022, its valuation has reached lows last seen in March 2020.
• Tesla's demand problem likely isn't limited to the company. Instead, it could be an industry-wide challenge as it deals with weaker demand amid worsened macro headwinds.
• Hence, Tesla could still emerge stronger than its peers due to its more robust free cash flow profitability.

Tesla, Inc. ( TSLA ) posted its Q4'22 and FY22 deliveries and production update that came below the consensus estimates. Analysts' deliveries estimates have already been revised downward before Tesla's update to 420K for the quarter . Yet, CEO Elon Musk & team managed to disappoint its fervent bulls by posting Q4 deliveries of 405.28K, missing the mark by nearly 4%.

As such, its Q4 performance is down significantly from its Q3 results. Accordingly, Tesla posted deliveries growth of 31%, well below its production increase of 44%. It also followed Q3's underwhelming performance as deliveries growth markedly lagged production growth, as seen above.

Hence, the euphoria from its stupendous 2021 performance is likely over, as the global economy will likely enter a recession . Moreover, with China still nursing its wounds from its COVID reopening as caseloads surged , Tesla's near-term growth momentum could face more challenging headwinds in 2023.

Notwithstanding, China's demand and production challenges have also impacted its leading peers. For instance, China's leading NEV maker BYD Company ( OTCPK:BYDDF ), posted FY22 NEV deliveries of 1.86M , below its revised estimates of 1.88M.

Notably, BYD had already downgraded its forecasts due to the impact of COVID infections on its production and supply chain. As such, the hit on BYD's sales likely suggests that the whole Chinese market is facing demand headwinds, even as the Chinese government intends to return the economy into growth mode in 2023.

Therefore, it should be clear by now that analysts' estimates for Tesla's Q4 will need to be revised further. In addition, we expect the Street to remain concerned over Tesla's H1'23 outlook as China's reopening has caused tremendous uncertainty over Tesla's demand/supply dynamics.

With Musk distracted by his Twitter troubles, investors are likely looking for Musk to appoint a strong leader to help recover its sales and manufacturing operations in 2023.

As such, we view Giga Shanghai's chief Tom Zhu's appointment to oversee Tesla's global sales and manufacturing operations as a stabilizing influence. Zhu has proved his mettle in helping lift Tesla China as its central export hub, benefiting from a robust supply chain and hardworking Chinese employees.

Investors should recall Elon Musk's commentary in May 2022 as he emphasized:

[Giga Shanghai employees] won't just be burning the midnight oil, they will be burning the 3 am oil, they won't even leave the factory type of thing, whereas in America, people are trying to avoid going to work at all. - Guardian

However, it remains to be seen whether Zhu could instill the type of fervor in helping ramp Giga Texas, or even Giga Berlin , which was reportedly facing " motivational challenges." Moreover, we believe the critical impediment facing Tesla now is more intense competition worsened by a weaker demand outlook driven by recessionary headwinds.

Also, EV consumers are said to be less brand loyal and willing to switch brands as they transition from ICE vehicles to EVs.

However, investors considering whether investing in TSLA makes sense now will need to assess whether most of the challenges that we delineated have been priced in.

With TSLA down more than 65% in 2022, its valuation has been battered significantly. As such, its NTM EBITDA multiple of 15.4x has reached levels last seen in March 2020 (at the depths of the COVID pandemic).

However, Barron's highlighted that the focus for investors in 2023 is to consider whether a weaker demand outlook could weaken Tesla's profitability margins further, particularly its free cash flow ((FCF)) profitability.

Wall Street consensus estimates suggest that Tesla could still post an FY23 FCF margin of 13.1%, above FY22's 10.9%. Therefore, analysts still see Tesla improving its scale efficiencies in 2023, given its deliveries estimates of about 1.85M vehicles (midpoint), up nearly 41% YoY. As such, it's expected to be slightly above FY22's 40% increase but well below FY21's 88% growth.

Therefore, there's little doubt that Tesla's growth momentum has slowed remarkably. However, we believe if Tesla could execute well against less optimistic Street estimates in 2023, it could regain its mojo moving ahead.

Zhu's appointment could also help Texas and Berlin improve their ramp significantly, improving scale efficiencies for Tesla, and potentially lifting its profitability. Also, Tesla could introduce a lower-priced short-ranged Model Y for the North American market fitted with its 4680 cells, helping it compete more effectively in the SUV segment. Hence, Zhu could be Musk's trump card in a highly challenging year for Tesla as it attempts to overcome significant macro challenges and heightened competition.

For now, expect analysts to emerge with more price targets ((PT)) cuts, as the current consensus PT of $248 is still too high, suggesting an implied upside of more than 100%.

With Tesla likely expected to overcome profitability challenges in 2023 better than its leading peers , we believe its battered valuation should proffer investors willing to take the plunge with robust reward/risk at these levels.

Rating: Buy (Reiterated).

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