By Amy, Tesla Investor | Follow her on Twitter: @SF___Tahoe
Tesla announced another record quarter and record year yesterday. Tesla’s Q4 ’22 earnings were a beat both on EPS and revenue.
The numbers:
EPS (non-GAAP): $1.19 vs. $1.10 est.
EPS (GAAP): $1.07 vs. $0.98 est.
Revenue: $24.318B vs. $23.6B est.
Automotive Gross Margin: 25.9% (v.s. 26.4% est.)
$3.687 GAAP net income
Tesla once again executed better than expected. Also of importance was the 2023 guidance. There were warnings in the guidance about the uncertain nature of the macro environment. Tesla reaffirmed ~50% YoY growth on a multi-year horizon (starting with 2021 numbers) but tempered expectations by guiding to 1.8 million vehicles in 2023 (allows for a less than “calm” macro environment). This is less than 50% YoY but aligns with the long-term growth target. Notably, Tesla is playing Wall Street’s game, reducing its internal goal of 2 million cars (they have enough supply and demand) to 1.8 million cars to manage expectations. Musk noted [if there was] a severe recession, cash is king. He wants to be cautious about using cash. Tesla is in a strong position with just $44M in debt and $22B in cash.
Demand
Demand concerns were addressed both for auto and energy products. Auto orders from the beginning of the year are at the greatest rate ever, probably 2x production. In fact, Tesla raised their prices slightly for the Model Y. Tesla plans to grow auto production as fast as possible. Continued focus on Tesla being the best manufacturer will sustain its competitive advantage. Consumer interest and demand for energy are high.
Margins
Margin concerns were partially addressed as well. Tesla had increasing manufacturing efficiencies in the quarter. Tesla CFO Zach Kirkhorn said Tesla is improving volume while improving overhead efficiencies. Tesla is attacking every area of cost and redesigning its supply chain. Tesla did not provide specific guidance on margins, stating there is a lot of uncertainty. But Kirkhorn did note they are hoping to stay above an auto gross margin of 20% and ASP of $47,000.
Managing to Max Operating Margin
Kirkhorn said Tesla is now maximizing operating margin as other areas become more important, particularly energy. My take: No longer is auto profit margin and deliveries king. Now gross margins are. There are ramifications in the way Tesla is run moving forward. Auto used to be able to steal resources and supplies from other departments. For example, during the Model 3 ramp, all employees that could help did. So, in my opinion, this is a change from the past and de-emphasizes autos moving forward. It also reduces the importance of high auto margins. Elon Musk noted that retail investors understand the worth of software sales.
Auto is now one component. Internal resources will likely be deployed based on contribution to gross margin. This is a part of a shift to ramping energy, not just auto. Energy is affirmed to have outsize growth for the next several years. This also makes room for services like FSD, insurance, and others. Tesla is not resource constrained. It is notable that no specific supply constraints were mentioned (past issues with computer chips seem resolved), and it was affirmed there are enough battery components to ramp energy and auto.
TESLA AUTO
CyberTruck
CyberTruck is on track for production mid-summer, with volume production in 2024. Tesla is currently installing production equipment and have produced beta vehicles. GigaTexas has built one of four lines. They are commissioning and installing the other three. CyberTruck will have FSD Hardware 4.
Gen 3 Platform
Elon Musk is already moving into the future when the rest of us are looking at the past. First comments on the Gen 3 platform will be made on Investor Day. New efficiencies were mentioned in drivetrains—improving cost of goods sold (COGS) by design, not just supply cost savings) and battery cells, both of which will be required to produce two Gen 3 Platform vehicles for the cost of one Model 3.
Commercial Vehicles
There will be a new factory for Tesla Semi in Nevada. Given IRA incentives for commercial vehicles, Musk was asked about Tesla's plans for commercial vehicles outside of the Semi but did not go into details. Of course….
Tesla Insurance
Tesla Insurance won’t be broken out separately on financials. Kirkhorn indicated it was worth about a $300 million run rate. Insurance is growing at 20% per quarter (growing faster than vehicles). Tesla Insurance improves the cost of ownership for consumers and provides a feedback loop for engineering on the costs of repairs.
FSD
FSD is now released to almost 400,000 people in the US and Canada. There was no specific information on FSD take rates: Musk said enthusiasm increased with each release. FSD Hardware 4 is a significant upgrade. It will increase FSD from 200-300x to 500-600x better than a human driver. Musk noted it wouldn’t be economically feasible to upgrade customers from HW3 to HW4. FSD revenue recognition is two components: Fully recognizing EAP at the point of sale versus incremental recognition of FSD, where only a portion is recognized, and the rest is deferred revenue.
AI
Elon said Tesla is an AI company. FSD interface is the most efficient interface computer in the world. Tesla has Dojo, a world-class AI talent joining Tesla, Optimus, and a car robot on wheels. He doesn’t see anyone close to Tesla in solving real-world AI. AI is an order of magnitude potential and could have a 10x increase in Tesla’s market cap. Elon Musk said he was talking with the Tesla AI/FSD team the previous night to determine which other FSD solution was closest to Tesla’s. Tesla views itself as having a commanding FSD lead. Elon said he “can’t see the second-place team with a telescope!”
Tesla Energy
Tesla Energy is the best ever for both utility and consumer products. Tesla Energy saw record growth, and it is accelerating. MegaPacks are expected to grow at a faster rate than Auto. Energy storage deployments increased by 152% YoY in Q4 to 2.5 GWh, for a total deployment of 6.5 GWh in 2022. Tesla is also ramping production at Lathrop with the MegaPack factory because MegaPack demand exceeds production. Tesla is trying to find the fastest path to 1,000 GWh productions. Tesla is carefully thinking about more MegaPack factories. There are possible factory announcements later this year and next. Tesla made strides toward Battery Day's goal of improving battery efficiency. They are now applying Tesla’s manufacturing competitive strength to battery cells. Tesla noted the small footprint of the announced factory in Nevada for 100MWh vs. the current space to produce much less MWh, which is indicative of battery cell manufacturing advances.
IRA Credits
Elon said long-term IRA battery credits are probably gigantic but not significant for this year because battery production is being split with Panasonic. Kirkhorn said IRA will have $150-250 million credits per quarter this year, growing quarter over quarter. Tesla will be moving more battery manufacturing onshore, which is already the plan and will use credits to improve affordability.
My Take
It was an excellent earnings call. Tesla is managing for sustained growth of its Energy and Auto divisions. Tesla is prepared to weather a severe recession if necessary and continuously drives to reduce costs through production efficiencies, redesigning the supply chain, and vertically integrating, where necessary. Allusions were made to new, not yet-known pipeline products. Tesla has increased its profit from every dollar spent and increased its leverage from Q421 vs. Q422. Net profits were +59% on a +37% increase in net revenue, a 22% difference. Its factories are evermore efficient, production is streamlined, the design was improved, and supply costs were lowered. Plus, Tesla is ramping up Energy, FSD, and its other services.