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PostsBubble Burst Moment! Tesla, Reality is Harsh
Tesla (TSLA.O) released its Q3 2023 earnings report after the US stock market closed on October 19th, Beijing time. Following the warning from Dolphin Research when the market cap exceeded $900 billion that only true fans would dare to touch it, the harsh reality of the third quarter once again indicates that Tesla's correction may not be over yet. True fans need to stay calm!
Here are the key points:
1. Gross margin has dropped to the 15%+ level! The gross margin of Tesla's car sales (excluding regulatory credits) in the third quarter further slipped to 15.7%, which is generally expected to be around 18% by analysts. Just when Dolphin Research believed that the bare selling car gross margin of around 18% had no room for further decline, Tesla's gross margin dropped again.
2. Clearing inventory or weak demand? The third quarter is a transitional period for replacing old with new cars, so we shouldn't be too critical of Tesla's sales volume and gross margin. The sales volume in the third quarter was 435,000 units, and the gross margin was less than 16%, which is lower than market expectations. However, it is within Dolphin Research's original judgment. The key here is whether the judgment of production suspension and low sales volume is purely due to the replacement of old cars or because of weak demand. Dolphin Research tends to believe that it is a combination of both.
Due to the insufficient sales volume and the price reduction to clear inventory, Tesla's total revenue this quarter was only $23.35 billion, far below the market's expectation of $24.6 billion.
3. Too much price reduction and insufficient cost reduction: The most significant change in the economic aspect of the third quarter is that, in addition to continuous price reductions, the fixed amortization cost has increased, both in absolute value and per vehicle. The increase in absolute value reflects the slowdown in the new factory's production ramp-up and increased investment in DOJO, while the increase in per vehicle is mainly due to the underutilization of production capacity caused by the suspension of the Shanghai factory.
At the same time, the cost reduction effect of raw materials in the third quarter was limited (the cost per vehicle decreased by less than $800, while the amortization cost increased by $300, and the vehicle price decreased by $1,500). The cost reduction through technology (mainly reflected in new vehicles) has not yet been realized, resulting in a significant decrease of $1,100 in gross profit per vehicle.
4. Cost control temporarily halted: Due to increased research and development investment and capital expenditure in AI-related areas such as DOJO, as well as the upcoming delivery of Cybertruck and the development of a new generation of vehicle platforms, Tesla's research and development expenses in this quarter exceeded expectations, and sales expenses also increased significantly.
5. Operating profit of $1.76 billion, significantly lower than the market's expectation of $2.4 billion. The key drag behind this is the low unit price of cars and lower-than-expected gross margin performance. The energy business has slowed down due to the drag from photovoltaics, but the gross margin has soared to 24%, far exceeding the automotive business. Although the second-hand car business has slowed down, the charging piles and insurance have supported the service business, and the growth rate is still acceptable, but the gross margin has slowed down. However, no matter how these two businesses grow or improve profitability, due to their relatively small scale compared to the automotive business, they can hardly have a significant impact on the overall situation.
Dolphin Research's overall view:
In the past period, Dolphin Research has systematically studied Tesla through three in-depth articles: "FSD Autopilot: Can't Support Tesla's Next Valuation Miracle", "The Lion King Meets the Wolf Pack, Can Tesla "Watch Over Home"?", and "Tesla: How Far is Musk's Trillion-Dollar Empire Dream?".
It is clear that Tesla's changes in the car manufacturing business this year have been deteriorating rather than improving. The increase in valuation is mainly driven by the expansion of other business lines, with the intelligent driving business story taking the lead. There are also charging pile business, energy storage business, even robot business, and the market valuation has shifted from focusing on car manufacturing to the era of valuation based on different business segments.
However, Dolphin Research emphasizes once again that the basic premise for the transition from hardware valuation to a dual-track valuation strategy of software and hardware is that the foundation of the car manufacturing business must remain strong. But looking at the evolution of the car manufacturing business around 2024, it is difficult to say how strong the foundation will be:
a) Firstly, Tesla has adjusted its focus from prioritizing production capacity. The steady-state production capacity targets for the two new factories have been lowered. The target of producing 10,000 vehicles per week is no longer mentioned. In the conference call, Tesla has already made sufficient expectations for the production of the new vehicle Cybertruck in 2024. The suspension of production in the third quarter under the name of trade-in program also implies the company's balance between production and sales. Since the incremental sales in 2024 mainly rely on the release of new factories, such adjustments may mean that the current sales target of 2.3 million vehicles in 2024 may be revised downward.
b) The next new vehicle platform that can truly support growth may not contribute significant sales until 2025.
c) Tesla's unwavering investment in FSD may bring about a long-term ecological closed-loop and even ecological barriers. However, this also means that the investment in computing power and technology research and development in 2024 will further increase the overall capital intensity of the group. Whether V12 can be implemented in 2024 is uncertain due to the fundamental changes in algorithmic logic. Dolphin Research actually holds a conservative attitude towards this.
Overall, Dolphin Research believes that Tesla may rebound from the operating bottom in the last quarter of 2023, but beyond 2023 and 2024, Tesla may still be a year of high investment and low output. Of course, these high investments correspond to the establishment of Tesla's long-term competitive barriers. The long-term logic of Tesla remains intact. However, the short-term market's linear extrapolation of Tesla's performance in terms of pricing may not be accurate.There is a high probability of facing downward pressure.
Here is a detailed analysis of the earnings report:
1. Overall: Comprising Production First Strategy?
1.1 Price reduction to clear inventory, Tesla's unit price keeps sliding
In the third quarter of 2023, Tesla's revenue was $23.35 billion, with a year-on-year growth rate of just 9%, significantly lower than the market's consensus expectation of $24.6 billion.
Due to the previously announced sales figures being lower than the market's estimate, the actual revenue still fell short of expectations. This is mainly because the actual unit price of the vehicles is significantly lower after deducting carbon credits. In addition, the revenue from the energy business was also mediocre due to the decline in photovoltaic installations, resulting in overall poor revenue performance.
1.2 Profitability of the flagship product declines, Tesla's profit halves
In each performance report, the automotive gross margin performance is more significant than the revenue. This year, Tesla has consistently disappointed in this aspect (detailed analysis below), and in the third quarter, it reached the most severe level of the year. As a result, the operating profit was only $1.8 billion, more than halved compared to last year, while the market expectation was close to $2.4 billion. The operating profit margin was also only 7.6%, significantly lower than market expectations.
Behind the poor operating profit this time, on one hand, the decline in profitability per vehicle is due to factors such as clearing inventory of old models and the closure of the main production capacity at the Shanghai factory. On the other hand, the increased investment in Tesla's DOJO and the continuous advancement of new models and other investments, while the slow progress of the two new factory capacities that can dilute costs.
Let's first look at the most important automotive profitability issue:
1.3 Per-vehicle profitability falters again! As the most important observation indicator for each quarter, the overall gross margin in the third quarter of this year was only 17.9%, significantly lower than the market's consensus expectation of 18.3%. The most critical factor is the significant decline in the gross margin of sales of vehicles without carbon credits, which has dropped to 15.7%, while the market expectation is at 18%, even higher than the actual performance of 17.5% in the second quarter.
Considering the factory closure in the third quarter, the clearance of old vehicle promotions, and the double decline in sales volume and unit price, such market expectations are clearly unrealistic. However, even so, a bare car business gross margin of less than 16% is still lower than the conservative estimates seen by Dolphin Research in the market.
Next, let's focus on the impact on automotive gross margin from an economic perspective.2. The core issue of the sharp decline in gross profit margin: Is it due to the problem of old-to-new transition or the inability to sell?
2.1 Gross profit margin from car sales has dropped again!
In the third quarter, the revenue from car sales (excluding credits and leasing) was $44,500, a decrease of nearly $1,500 compared to the previous quarter, with an actual decline of 3.2%. This decline is even greater than the price reduction in the previous quarter.
When Dolphin Research estimated that Tesla had already given up most of its excess gross profit margin and had reached the limit of reducing costs, in the third quarter, due to the clearance of old models (both Tesla 3 and Y have launched new models), Tesla introduced car purchase activities such as offering actual insurance subsidies and referral discounts for existing owners in China, the United States, and other regions.
For example, in the Chinese market, the old model of Model 3 was given a subsidy of 8,000 RMB for limited-time insurance, and the starting price of the old model of Model Y with long range was adjusted from 313,900 RMB to 299,900 RMB, while the high-performance version of Model Y was adjusted from 363,900 RMB to 349,900 RMB, with a discount of 14,000 RMB compared to the original price. In the United States, temporary promotions and other measures resulted in a decline in the price of each car ranging from $2,000 to $5,000.
When the price of each car decreases, the cost of each car needs to decrease at a higher proportion in order to increase the gross profit margin. Generally speaking, Tesla's cost reduction comes from four dimensions: 1) dilution of sales volume; 2) technological cost reduction; 3) natural cost reduction of battery raw materials; 4) government subsidies.
By combining the company's depreciation and amortization expenses, Dolphin Research can clearly see the economic account of each car:
1) Depreciation and amortization expenses per car continue to rise: Due to the investment in new factories and supercomputing centers, Tesla's depreciation and amortization expenses are rising rigidly every quarter, regardless of the sales volume of cars. In theory, such investment can only be diluted by the sales volume of cars. However, in this quarter, the decline in sales volume led to a further increase in the depreciation and amortization expenses per car to $2,800, which is $300 higher than the previous quarter. The main reasons behind this, according to Dolphin Research's estimation, are:
a) During the third quarter when the Model 3 was being upgraded, the Shanghai factory was shut down, resulting in insufficient capacity utilization.
b) Both new factories, the Austin factory and the German factory, are progressing slowly in ramping up production, and they have already given up their respective targets of producing 10,000 vehicles per week.
c) Tesla's V12 version of autonomous driving is based entirely on large-scale algorithms, which has led to a significant increase in computing power requirements. This has increased the investment in the self-developed DOJO supercomputer and the corresponding capital expenditure, putting additional pressure on depreciation and amortization expenses in this quarter.
2) Variable costs per car have only decreased by less than $800: In this quarter, due to the insufficient sales volume and the limited dilution effect of depreciation and amortization, government subsidies did provide some offsetting power, but the cost reduction from technological improvements and material optimization, which mainly come from new car sales, did not show significant effects.And as for the remaining cost reduction, the price of lithium carbonate in this quarter first rose and then fell on a quarterly average basis, with a small decrease in the average price during this period. This resulted in a savings of only $800 in variable costs per vehicle.
3) Another step down in gross profit margin for cars: The price per vehicle decreased by nearly 1500 yuan compared to the previous quarter, while depreciation costs increased by $300 due to increased capital investment and factory shutdowns. At the same time, variable costs per vehicle decreased by less than 800 yuan, resulting in a significant decline in gross profit margin per vehicle from 8100 USD in the previous quarter to 7000 USD this quarter. The gross profit margin for car sales is now only 15.7%.
As a result, the gross profit margin for Tesla's direct car sales business has reached this level:
Through the above analysis, it is clear that the significant decline in gross profit margin is due to obvious temporary issues, but it also implies a problem of insufficient demand.
The mismatch between production and sales during model updates;
The factory shutdown and upgrade issue in Shanghai, which was officially arranged in relation to the Model 3 update. However, Dolphin Research suspects that it is also related to the large market inventory and the need to halt production to digest inventory. This is especially evident when considering the upcoming price promotions in the fourth quarter. The problem of insufficient market demand is also apparent. Of course, controlling the pace of production can also allow Tesla to maximize its annual profit goals by ramping up production when lithium prices are low in the fourth quarter.
Since the poor performance in the third quarter is related to model updates, the real core issue is whether Tesla's gross profit margin can stop declining and continue to rise in the fourth quarter and in 2024.
2.2 The crucial question is, can the gross profit margin for cars stop declining and start to rise again?
After a significant decline in gross profit margin in the third quarter, can it stabilize in the fourth quarter? After all, Tesla has already launched the new Model 3 with increased prices in China and Europe in the fourth quarter (New Model 3 on sale, prices increased instead of decreased?), and the new Model Y has also been launched globally.However, Dolphin Research still has doubts about the current situation:
The new Model 3 is mainly sold in China and Europe. In the highly competitive Chinese market, buyers have already been accustomed to the "more quantity, same price" mentality offered by Chinese car manufacturers. However, Tesla has actually increased the price of the new Model 3 by over 10,000 yuan. It remains to be seen how many units this car can sell in China and whether a price reduction is necessary. Currently, industry insiders generally believe that Tesla's price increase on the new model may be overly confident.
In the US market, a new round of price reductions has already begun in October. After the price reduction on October 6th for the Model 3 and Model Y, the average price has dropped by 4-5%.
Although sales in the third quarter were low, Tesla is still insisting on delivering 1.8 million vehicles for the whole year. This basically means that they need to deliver 480,000 units in the fourth quarter, which would require achieving a historical high in sales volume. The Cybertruck, which will start deliveries on November 30th, is unlikely to contribute any substantial sales due to non-standard supply chains and battery capacity issues. Under these circumstances, it is not ruled out that price reductions will be needed in Europe, in addition to the United States, to boost sales.
2.3) The decline in unit price is not severe, and automotive revenue is still satisfactory: In the third quarter, Tesla achieved a total of $19.6 billion in automotive sales and regulatory credit revenue, a year-on-year increase of 46%, slightly lower than the market's expected $20.3 billion, mainly due to poor performance in unit price. Among them, automotive leasing revenue was $490 million, also lower than the previous quarter's revenue.
Regulatory credit revenue reached $550 million this quarter, exceeding the market's expected $340 million. However, in the long run, this revenue contribution is unlikely to be substantial due to the entire automotive industry's shift towards green energy driving.
Third, with demand slowing down, will Tesla balance its "sales first" operational strategy?
Whether it is supply-driven or demand-driven, Tesla has always emphasized producing and selling as many cars as there is demand. But now, with the gross profit margin of the car sales business already below 16%, will Tesla further increase sales volume?
a) The company is indeed still maintaining its sales target of 1.8 million units for this year. With the low sales volume in the third quarter, it puts tremendous pressure on Tesla to reduce prices in the fourth quarter in order to meet the annual target.However, Dolphin Research has noticed some changes: Behind the closure of the Shanghai factory in the third quarter, the obvious reason is the replacement of cars. However, the changes in the delivery cycle and the longer inventory turnover days also imply certain sales pressure. Tesla has indeed made some concessions in its recent communication with investors. The production ramp-up of the Austin factory and the German factory will slow down. It has given up the target of each factory stabilizing at a weekly production of 10,000 vehicles. The reason is that the 24/7 shift rotation in the German factory is too costly due to labor law issues, and the cost cannot be justified. The Austin factory is still ramping up, but the weekly production is only between 5,000 and 10,000 vehicles.
So, a very realistic question to consider here is how the marginal changes in Tesla's sales in 2024 may be. Dolphin Research has noticed that many sellers in the market have placed Tesla's sales in 2024 at around 2.3 million vehicles, which is equivalent to a pure incremental increase of 500,000 vehicles in 2024.
However, now that the company has lowered the ramp-up targets and speed for the German and Austin factories, and considering that the Cybertruck will only use the 4680 battery, it is difficult for the Cybertruck to contribute much incremental growth in 2024, given the current production ramp-up speed of the 4680 battery.
In terms of progress on new vehicles, it would be considered on schedule for the next vehicle platform to be released in 2024. Especially considering the delayed progress in the construction of the Mexican factory, even if the Mexican factory is not the first place to produce the new affordable car, it is unlikely to contribute any sales volume in 2024.
Fourth, AI and the new vehicle platform are both indispensable, and investment needs to be increased!
Corresponding to the relative blank in the output side in 2024, Tesla will actually increase its investment because it needs to prepare for the next vehicle platform. In V12, the mid-to-end vehicle platform will fully use large models to iterate the current partial regulatory control algorithm, which means that Tesla's demand for backend training computing power will greatly increase.
This corresponds to the supercomputing power of DOJO and the development of the core D1 chip behind DOJO. Due to this investment, Tesla has increased its capital expenditure for 2024 by more than 1 billion. And these investments will soon be reflected in research and development expenses and amortization expenses.
There are already signs of this in the third quarter: Tesla's research and development expenses and sales expenses have exceeded market expectations, as well as the intensity of capital expenditures. Among them, research and development expenses exceeded market expectations by nearly 300 million. The market's expectation for capital expenditures in the third quarter was only 2 billion, but Tesla's actual investment this quarter was 2.5 billion.
Summary (One to Four) clearly shows that in 2024, Tesla will have a year of low output and high investment in the car manufacturing business.
Currently, market expectations for sales in 2024 may need to be further lowered. However, the good news is that after the automotive gross margin dropped to the level of 15-16%, Tesla seems to be rebalancing and seeking a balance between production and gross margin. This should be relatively good news for the automotive gross margin in 2024.
This also means that in terms of actual car delivery results in 2024, Tesla as a whole may find it difficult to provide surprises. This puts high demands on its next real growth point - the on-time delivery of the new generation car platform. In addition, the business that can really increase its valuation imagination - the AI intelligent driving business, may also need some substantial progress, such as the landing of FSD V12, driving further improvement in FSD penetration rate, and to some extent, continuing to support Tesla's AI valuation imagination.
However, Dolphin Research has noticed that the revolutionary adjustment in the underlying algorithm of FSD V12, abandoning the rule-based code and upgrading to end-to-end algorithm using large models, may not necessarily be fully implemented in 2024. Overall, 2024 is likely to be a challenging year for Tesla.
V. Energy slowdown, continued imagination in services
5.1 Energy surge: Tesla's energy storage and photovoltaic business includes selling photovoltaic systems and energy storage systems to residential customers (to C), small and medium-sized commercial customers (to B), and large commercial and utility-level customers.
In the third quarter of this year, revenue reached $1.56 billion, a year-on-year increase of 40%, but the growth rate has slowed down significantly. Among them, the growth rate of the energy storage business is still strong. Due to the increase in capacity of the California Megapack factory, the installation volume in the third quarter has reached nearly 4GWh, with a year-on-year growth rate of 90% on a high base.
In addition, in terms of capacity expansion, on April 9th, Tesla's energy storage super factory landed in Shanghai, which is used to produce large-scale commercial energy storage batteries (Megapack) and supply the global market. The initial planned annual production capacity is 10,000 units, with an energy storage scale of nearly 40GWh. It is planned to start construction in Q3 2023 and officially put into operation in Q2 2024.
As for the photovoltaic business, due to the expiration of the electricity subsidy policy for photovoltaic users (the policy requires power companies to buy back excess electricity from users who have installed renewable energy generation technology at a certain price, or deduct the amount of electricity generated from renewable energy from the consumer's total bill), the installation volume has dropped significantly this quarter, to less than 50MW.
However, in terms of gross margin, due to the rapid growth of the energy storage business, the gross margin continues to rise, reaching 24% in the third quarter, far exceeding the gross margin of the automotive sales business and the average gross margin level of the domestic energy storage industry.Overall, with the increase in energy storage business and the improvement in gross profit margin, Tesla's energy business has gradually become a long-term business with a story and short-term implementation, but with low long-term business barriers. The growth potential of this business is the main focus, and currently, in terms of Tesla's stock price, this business has already been fully valued.
5.2 Charging piles, insurance, and other after-sales services enter the imagination period of the business model. In the third quarter, Tesla achieved $2.2 billion in revenue from its service business, a year-on-year growth rate of 32%, but the gross profit margin decreased to 6%.
As Tesla's charging piles have become the new standard for basic costs in North America, Tesla continues to increase its investment in charging piles. Currently, there are nearly 5,600 supercharging stations worldwide, with over 50,000 supercharging connection points.
In this quarter, the main marginal increment of the service business comes from third-party paid charging services and insurance services. Dolphin Research estimates that the valuation of the used car business should have cooled down as new energy vehicles have accumulated in 4S stores.
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For Dolphin Research's previous articles, please refer to:
October 12, 2023, in-depth analysis: FSD Autopilot: Can't Support Tesla's Next Valuation Miracle
September 22, 2023, in-depth analysis: The Lion King Meets the Wolf Pack, Can Tesla "Guard the Home"?
September 19, 2023, in-depth analysis: Tesla: How Far is Musk's "Trillion Dollar Empire Dream"?
September 1, 2023, hot review: New Model 3 on Sale, Price Increases Instead of Decreases?July 20, 2023 Earnings Report Analysis: "Tesla, Only True Fans Dare to Take On"
July 20, 2023 Earnings Conference Call: "Tesla Minutes: Gross Margin Lost, Tesla May Continue to Lower Prices"
April 20, 2023 Earnings Report Analysis: "Tesla: Promising Year on Paper, Challenging Year in Reality, 'Long-lasting Companionship' is Difficult"
April 20, 2023 Earnings Conference Call: "Tesla: Confidently Selling Cars at Zero Profit, Harvesting with Autonomous Driving"
January 26, 2023 Earnings Report Analysis: "Tesla's Story Reshaped, Testing the Moment of Faith!"
January 26, 2023 Conference Call: "Tesla Minutes: 'No Competitor for Telescope in Autonomous Driving, Second Tesla Might Be in China'"
October 20, 2022 Earnings Report Analysis: "Fatal Question: When Demand is Insufficient, How to Maintain Profitability?"
October 20, 2022 Conference Call: "Minutes: 'Internal Combustion Cars Will Die, No Production Cuts at Any Time'"
July 21, 2022 Earnings Report Analysis: "Without Shanghai Factory's Lifeline, What Can Tesla Rely On?"2022年7月21日电话会《 Musk: I'm embarrassed by the repeated price increases》
2022年6月6日观点更新《 Did the US Stock Market Shake-Up Mistakenly Kill Apple, Tesla, and Nvidia?》
2022年4月21日《Thunder is Roaring in the New Energy Field, Tesla Continues to Boom》
2022年4月21日《 New Factory Production Capacity Boost, Tesla to Deliver 1.5 Million Vehicles in 2022 (Meeting Minutes)》
2022年2月28日观点更新《 Investing in Tesla: Safety Comes First in Times of Change》
2022年1月27日电话会《 Tesla: Musk Reiterates the Importance and Potential Value of FSD (Telephone Conference Minutes)》
2022年01月27日财报点评《Tesla's Brilliant Performance, Will it Take a Mid-game Break?》
2021年12月6日观点更新《 Where is Tesla Stock Heading as Musk Attempts to Pay His Taxes?》
2021年10月21日电话会《 Tesla: Annual Sales of One Million Vehicles are Just Around the Corner, Will Musk Let Go?》
2021年10月21日财报点评《 Tesla: Cathy Wood Rallies for $3,000, is the Sky the Limit?》On July 27th, 2021, the Telephone Conference of Tesla's Q2 2021 Performance and Summary was held.
On July 27th, 2021, the Financial Report Review of Tesla: There Is Always One More Amazing Thing They Can Do! was published.
On April 27th, 2021, the Tesla 2021 Q1 Performance Live Summary was held.
On April 27th, 2021, the Financial Report Review of Tesla's First Quarterly Report Without Surprises: What to Expect Next? was published.
On June 3rd, 2021, the Conclusion of Tesla (Part 2): Overrated or Underrated, Where Is Tesla's Story Going? was published.
On May 21st, 2021, a long article was published, covering Tesla's "magic" and its potential for the next decade.
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