BYDDY - Tesla: Running Circles Around The Competition

2023-04-04 16:45:26 ET

Summary

• Tesla, Inc.’s deliveries for F1Q 2023 beat Wall Street expectations.
• Revenues and earnings for the period are likely to come in ahead of analyst projections.
• Tesla further established its leadership position of the EV industry in the first quarter.
• We reiterate our $802/share Price Target and Buy Rating for Tesla stock.

Investment Conclusion

Tesla, Inc. ( TSLA ) produced 440,808 vehicles and delivered 422,875, during F1Q2023. The figures beat Wall Street estimates, which anticipated 420,000 deliveries. On a year-over-year basis, deliveries increased by 36%. Based on ongoing reports during the period, indicating strong sales in China, Europe, and the U.S., due to the significant reduction in prices of Tesla's most popular cars, the Model Y and Model 3 (which represented 98% of deliveries over the quarter), the results although not surprising, nevertheless, confirmed that Tesla's continues to enjoy strong customer appeal.

Over the near term, when the firm reports F1Q2023 financial results on April 19, after market close, we expect actual revenues and earnings to come in ahead of analyst predictions of $23.4 billion and $0.86/share, based on the beat in deliveries and operating leverage due to reduced spending on R&D and SG&A. In addition, even though, margin erosion is anticipated propelled by the significant discounting that unfolded during the period, a significant fraction of the shortfall is likely to be mitigated due to: revenue leverage from incremental sales; lower component costs fueled by disinflationary trends; and growth in production output at TSLA's larger plants in Austin and Shanghai, which are associated with higher margins.

Longer term, fueled by sustained industry-leading: production capacity; profit margins; and customer demand; TSLA appears well-positioned to drive a decade of rapid growth. In that regard, it is noteworthy that at the company's Investor Day held in early March, management set a production target of 20 million cars/year by 2030. Tesla outlined reasons behind its thesis that there is likely to unfold an unmet need for 20 million Teslas/year by 2030, strategies being implemented to achieve the production target, and factors that would compel customers to select 20 million Teslas/year over EVs from alternate vehicle producers.

It is important to note that, although TSLA is developing an EV that will be priced significantly below price points associated with its present fleet, current Tesla models outsell competitor EVs, despite their higher price tags. Therefore, we believe, that TSLA's imminent launch of an ~$25,000 EV will reflect in a customer rush to purchase the vehicles, damaging the marketability of EVs associated with the peer group.

Given our thesis that TSLA is likely to sell 20 million vehicles/year by 2030, we reiterate our $802/share Price Target indicated in our initiation report on the company, published last October. In addition, our assertion in our previous article that TSLA's market value will eventually surpass that of Saudi Aramco remains valid.

Key Takeaways From The First Quarter

Based on developments that unfolded from January through March, TSLA appeared to consolidate its leadership position of the EV industry, in our judgment. The following factors drove our conclusion.

Savvy Leadership. For a company that almost never lowered prices as demand for its cars always outstripped supply, TSLA's prompt turnaround to reduce prices on its vehicles, when the order backlog shrunk to 74,000 units in December from 476,000 in July, was prudent. Even though, some fraction of the shortfall could be attributed to substantial increase in production over the final quarter of 2022, declining customer demand likely played a role.

The company began reducing prices in China last October, with another slash enacted in January. In the U.S., price cuts on Tesla cars were implemented in January. Later in the quarter, the firm raised prices on its Model Y and Model 3 vehicles, as customer demand escalated. Considering that on a sequential basis, deliveries of Teslas advanced by merely 4% compared to the previous quarter, had the discounting not been enacted, Tesla deliveries would likely have declined on a quarter-over-quarter basis. In our opinion, these maneuvers signified the firm's nimbleness in responding in real-time to anomalies that could limit growth.

Solid Long-Term Growth Plans. Based on its vision of a sustainable energy earth in our lifetime, TSLA outlined its growth plans for the decade, during its Investor Day. Given TSLA's estimates that 11x the current base of EVs is required for complete electrification of the automobile industry, the firm believes that a production level of 20 million Teslas/year will be appropriate by 2030.

The company expects to drive manufacturing to those levels by launching eight new Giga factories over time, with output far exceeding that associated with current facilities, through: the synchronization of efforts related to design, engineering, construction, and manufacturing; and automation of the assembly process.

In addition, TSLA anticipates that it can lower the cost of production by 50% versus that associated with the Model Y, through: design innovation; vertical integration of the supply chain; eliminating the use of rare earths; reducing the number of components; and lowering labor hours required/car.

Finally, given that research conducted by the company indicated that for every $1,000 decline in price of a Tesla, there is a significant uptrend in customer demand for the car, it appears that affordability rather than desire is the gating factor limiting a substantial increase in the number of Teslas sold. Therefore, we believe that there is likely to be a market for 20 million low-price Teslas/year by 2030.

Competition In Disarray. Between having several of its EVs priced out of the $7,500/car subsidy associated with the Inflation Reduction Act, weakening customer sentiment, and the blowback linked to sharply lower prices of Teslas, the competition struggled during the first quarter.

In China, the largest market for EVs, with expected 2023 deliveries of 8.1 million vehicles, versus 3.2 million for Europe, and 1.9 million for the U.S., a TSLA initiated price war that began with the firm lowering prices of its EVs last October, has wreaked havoc on the peer group, in the region. Although, across the board, car companies, including local brands such as BYD Company Limited (BYDDY) and XPeng Inc. (XPEV), and global brands including Ford (F), Nissan (NSANY), Toyota (TM), BMW (BMWYY), and Volkswagen (VLKAF), reduced prices on their EVs, considering TSLA's strong first quarter performance in the geography, it appears that the competition encountered challenges in customer demand over the period. In that context, it is noteworthy that, according to a survey conducted by Wedbush Securities' Analyst, Dan Ives, 70% of the Chinese that have expressed an interest in purchasing an EV in 2023, appeared to favor picking a Tesla.

In the U.S., TSLA began cutting prices in January, on its Model Y and Model 3 (followed by Model S and Model X), for the most part to render them appropriate for the $7,500 government subsidy on EVs, but also to counter the growing competition, as car companies began to ramp on their EV production and to shoulder some portion of the customer's financial burden, as the final price of EVs increased due to higher interest rates.

Ford followed by reducing the price associated with its most popular EV, the Mustang E-Mach, to render it competitive to the Model Y. General Motors (GM), Volkswagen, and Mercedes (MBGYY) resisted, citing strong reservations and demand, for their EVs. However, given that most car manufacturers turned around enacting price cuts on their EVs last month, it appears that demand likely declined over the quarter.

With Ford losing money on most of its EV line-up, and profit margins on EVs associated with other car producers, significantly below that of TSLA's, the price war is likely having an unfavorable impact on the competition's bottom lines. Although most of these companies anticipate that economies of scale associated with increased sales volume will improve profit margins, with TSLA planning to overwhelm the market with millions of premium quality Teslas, priced at ~$25,000, that their hope will be fulfilled appears unlikely, in our assessment.

Overall, given TSLA's maneuvers in quick succession, over the quarter, the competition's options to emerge from the stranglehold the company has over the industry, appear limited.

Bottom Line

Far from frittering away its first-mover advantage as the pioneer of the EV industry, Tesla built on its lead, ploughing a substantial fraction of its significant profits, back into the business, to develop a next-generation company, complete with a flat organizational structure and widespread automation of business processes. Cumulatively, given the magnitude of growth likely to unfold over the next seven years, there are numerous catalysts that will become pertinent over time, as Tesla continues to deliver on its promises. Therefore, we suggest that investors with an elongated investment horizon, dollar cost average down on the company's stock on pullbacks, to secure multi-bagger returns on capital.

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