This time, Dolphin and Mei Tou Jun cooperated to release the video version of the Tesla.US financial report interpretation. The detailed content will be released later, and Dolphin here only extracts the core information.

1. Below expectations? The original sin lies in the car price: Despite the excellent performance of energy and service revenue and profits, the significant downward trend in the price of a single car led to Tesla's Q3 revenue of $21.45 billion falling significantly below the expected $22.2 billion. The final operating profit of $3.7 billion was also $200 million less than the market's expected $3.9 billion.

However, if you look closely, in addition to revenue problems, the issue of profits is also caused by a decrease in the gross margin of the automotive business after the decline in the economy of a single car. In terms of expenses, they are very thrifty, especially in terms of a 20%+ decline in stock incentive compared to the same period last year, keeping sales and research and development at a low level with almost no growth. Tesla's performance was lower than expected this time, and the problem is quite serious, which is all caused by the automotive business.

2. Car sales: First, there were problems with sales volume, followed by a downturn in unit price and unit economy. During the National Day holiday, Tesla released a lower-than-expected sales volume and even plummeted with new energy vehicles.

From the financial report, we can see that the unit price and unit economy of cars have also deteriorated this quarter: the unit price of cars has fallen too quickly compared to Q2, resulting in the fully depreciated and variable costs of a single vehicle unable to cover the drop in the average price of a single vehicle, causing further decline in the gross margin of single-car, which is far from the critical watershed of 30%.

In addition to minor problems such as exchange rates and lower prices for Model 3/Y vehicles in the model structure, the more critical problem actually points to solving the supply-demand contradiction that has always plagued Tesla and the possibility of further lowering Tesla's car prices.

3. How far is Tesla from a real price cut when production capacity is no longer a bottleneck? After the Shanghai plant resumed production at the end of June and the Berlin plant climbed up, Tesla's production capacity has begun to increase. Tesla's customer reservation amount, third-party-tracked Tesla order surplus, and China's rapid reduction in the time of vehicle delivery all indicate that Tesla's production capacity is quickly consuming Tesla's order surplus, and the high gross margin of Tesla and Tesla's annual sales target of 50% also suggest that a Tesla price cut seems imminent.

For a more detailed analysis of the automotive business segment, please watch the subsequent video content.

4. Energy and services are both "doing well": Despite the problems with the automotive business, the energy storage and service businesses did well this quarter, as evidenced by the accelerated growth in revenue and the continued positive gross margin.

Especially in terms of energy storage, the impact of the short-term semiconductor on the installation has decreased this quarter, and in terms of service business, the pricing strategy of supercharging has been adjusted, the used car business is also good, and growth is very pleased. Just these two business units are in a "baby" state, with too small a proportion to compensate for the problems in the automotive business.

Dolphin Analyst's overall view: When Tesla's sales business needs evolve into the main contradiction, the real melee in the new energy vehicle market is coming!

Last quarter, Dolphin Analyst said that although Tesla's performance was mediocre, its faith in solving problems was in its production capacity. But now that production capacity is no longer a problem and the problem is gradually shifting to demand, Tesla's logic may soon undergo a major transformation. There are two key issues to consider here:

1) Is the price cut still far away? Tesla's previous problem was too many orders and insufficient production capacity. Now that the production capacity of the Shanghai plant has increased from over 500,000 vehicles at the end of 2021 to 750,000 vehicles at the beginning of 2022 and 1-1.2 million vehicles by the end of the year, and other domestic car manufacturers are also releasing a large amount of production capacity, Tesla's price cut in China is almost certain. At the same time, European and other overseas (excluding North America) markets need to digest more of Tesla's production capacity in China, and the sales of new energy vehicles in Europe in July and August were not good overall. As the current leader in the global new energy vehicle market, Tesla's downward trend in high prices corresponds to the melee in the global market when consumer discretionary spending is suppressed in high-interest environments.

2) Can the gross margin hold? If the strong US dollar continues to erode Tesla's automotive profit-making ability, and Tesla's Chinese-made cars are also cut in price, whether Tesla can withstand the gross margin is a question worth discussing. At least from the third quarter, the risk should be taken seriously: after all, when single car sales plummet too fast and raw material costs cannot sync, relying solely on fixed costs and depreciation to decrease, the pressure will be greater.

Overall, Dolphin Analyst believes that it may be wise to hide your investments in Tesla when the melee is imminent but before the outcome is clear: Of course, Tesla has the capital to dominate the industry during the melee-high car prices and gross margins make it easy to launch a price war, but the pressure from market competitors will be greater.

However, for Tesla, this may mean a short-term decline in gross margins, and the market needs to re-adjust its long-term sales and gross margin expectations. Without clearer guidance and several quarters of data verification, Tesla's financial certainty is declining, and a price decline is not surprising.

The following is the main content of the conference call:

I. Management Report:

1.1 Operating Conditions in Q3:

Production capacity: The Berlin plant has achieved a capacity of 2,000 vehicles per week, and the Texas Austin plant will also achieve a capacity of 2,000 vehicles per week soon;
4680 battery cells: Production capacity has tripled from the previous quarter, the second generation 4680 battery cells are produced at the Austin plant, and the production capacity of the California Fremont plant in Q3 22 reached a new record and maintained growth. The company's 4680 battery cell production progressed smoothly in Q3, and after previous deployment, it is expected to increase production capacity to a new level soon. In the process of production, the company is considering how to support the production of 4680 batteries with new generation production equipment, hoping for better integration with future power systems.
FSD Beta: The company has made good progress in FSD Beta, and in Dojo supercomputing, further development has been achieved to provide more features for FSD software. The company needs more talent in AI and FSD. More users participated in FSD Beta this quarter, and more available data will continue to improve the system and software, enabling vehicles to provide users with a better experience in different working modes.
Demand: Currently, the company's overall demand is strong, and the overall operating conditions are good. Several factories around the world are operating at full capacity. Although the Shanghai factory was severely affected by the epidemic earlier, the situation has improved greatly, and the company maintains a very strong operating profit margin.
Logistics & Delivery: In Q3, logistics capacity was severely restricted beyond expectations. Shipping from Shanghai to Australia faced difficulties, and in the United States and Europe, local truck transportation also faced difficulties.
Stock Buyback: Even if next year is a very difficult year, we still have the ability to buy back 5 to 10 billion U.S. dollars. This is pending review and approval by the board of directors.

1.2 Outlook for the fourth quarter

Production capacity: It is expected to achieve a 50% growth this year, but we are still paying continuous attention to and controlling supply chain risks.
Delivery volume: Due to the increase in "in-transit vehicles" awaiting delivery at the end of this year, the increase will be slightly lower than 50%.
In the fourth quarter, there will be a gap between production and delivery, and the cars in transit will be delivered quickly to customers after arriving at their destination in the first quarter.
Profit margin: Austin and Berlin's capacity ramp-up will continue to drag down profit margins, with their impact expected to be less than in the third quarter.

II. Analyst Q&A

Q: Can Tesla meet the strict battery content and assembly requirements for consumer tax deductions under the IRA Act within the next three years?

A: We expect the treasury to publish detailed guidance by the end of this year. Before that, it is difficult to fully determine the eligibility criteria. Tesla believes it can meet the requirements of the IRA Act, including both automotive and energy products, which will become an important driving force to accelerate its growth. We will achieve an annual output of 1000 GWh at the fastest speed.

Q: What is the current situation of new orders and backlog orders?

A: China is experiencing a reversal of decline, mainly in the real estate market, while Europe's economic recession is driven by the energy crisis. However, North America's health is quite good. The rate of interest rate hikes by the Federal Reserve exceeded expectations, but I believe they will eventually lower interest rates. In addition, combined with the current tight logistics capacity, we are very confident in our performance in Q4 22, and expect our car production and sales to continue to grow at an average rate of 50% per year (with possible delivery delays). Q: Can China achieve 50% annual growth? Will it maintain demand by lowering prices?

A: We believe that Tesla can achieve a sustained annual growth rate of 50% on the production and sales end and the revenue end. Some years may be slightly lower, and some years may be slightly higher, but overall, we will maintain a steady and high-speed growth.

Q: Germany experienced a severe energy crisis this winter. Will it affect the increase in production capacity of German factories? Does Tesla have a response plan?

A: The risk is small, and there is no indication that the production capacity of German factories has been affected. We have already developed contingency plans and are cooperating through the supply chain. All suppliers are prepared.

Q: What is the progress of Cybertruck and Semi?

A: Cybertruck: The Texas factory is preparing and will enter the pre-production phase in early next year. The previous epidemic affected the supply chain and affected the execution.

Semi: The first batch of products will be delivered to Pepsi on December 1 with maximum carrying capacity while maintaining 500 miles of range. The climbing will continue until the end of next year. It is estimated that there will be 50,000 Semi production capacity in North America in 2024 and will be expanded to other regions.

Q: How is the 4680's climbing situation?

A: The climbing is good, the output has increased by three times compared with the previous month, and more than 1,000 sets of 4680 battery packs are produced every week. The current focus is on reducing costs and expanding production to reduce the complexity and uncertainty of factory production.

The ultimate goal is to achieve an annual battery production capacity of 1000GWh in the United States, mainly iron-based (possibly twice the nickel-based), and there will also be some manganese iron lithium. Global demand for dynamic storage is expected to be between 300-400TWh.

Q: If there is a long-term decline, how will Tesla adjust?

A: Tesla will not reduce production under any circumstances, and the inevitable trend of electrification marks the death of fuel vehicles. Tesla is in a favorable position, although it cannot completely resist the decline, it has certain resilience.

Energy prices remain high, and the energy structure is shifting more towards wind and solar energy, and there is more room for energy storage. Tesla's energy storage solutions can handle wind, solar, and other energy sources to achieve 24*7 energy generation and storage .Tesla believes that the annual growth rate of energy storage is 150%-200%, faster than electric vehicles.

With Tesla's current cash balance and expected FCF and profit margins, it can withstand significant economic downturn pressures. Even if there is a severe economic recession in 2023, Tesla can generate considerable cash flow.

Q: From the first generation of Model S/X to the second generation of 3/Y, a 50% decrease in COGS was achieved. When will the third-generation models be released, and what is the cost reduction target?

A: Tesla is developing the next generation of models, and the release date cannot be determined yet. We are striving to achieve the 50% cost reduction goal again.

Q: Will Tesla consider layout upstream mining? A: The company prioritizes collaborating with suppliers to achieve raw material supply. However, if the supplier is not doing enough, Tesla will also make its own arrangements.

Q: What is Tesla's budget for producing 1TWh of batteries in the U.S.?

A: The information conveyed by the U.S. government is to promote the development of sustainable energy and there is no future for coal mines. Tesla does not have any financial data related to the 1TWh plan to disclose. But the company will bring innovation to the entire battery supply chain and improve efficiency, so the funding required in this area will be less than people imagine.

Q: What is the progress of FSD?

A: It is expected to enable users who have pre-ordered in the United States to enjoy FSD services before the end of the year. It has not yet obtained regulatory approval, but it will provide a better experience after obtaining regulatory approval.

Q: The IRA Act stipulates that domestic battery components in the United States must be purchased. What measures does the company have in response?

A: At present, the company has established cross-departmental teams to monitor and consider countermeasures, and is actively communicating with the government. Tesla believes that it has a way to reach the threshold and obtain all exemptions.

Q: How is the company's capital expenditure? Will you consider using leverage?

A: The company's operating leverage has indeed increased a lot, but it is still at a good level in this quarter. The company's total operating expenses are slowly increasing, and it is difficult to maintain stability. However, the cost per unit sale will continue to decrease, and the company's revenue growth rate is higher than the cost growth rate, which is expected to improve the company's efficiency level.

As for capital expenditures, the company has always spent money on the cutting edge. The departments actively communicate with each other, and the engineers are cost-conscious. It will not blindly invest or spend money.

Q: Raw material prices have started to decline. Will Tesla adjust prices globally?

A: Although the price of raw materials has fallen recently, it is still very expensive for the electric vehicle industry with a high proportion of raw materials, and the prices of some raw materials are still rising. Inflation has been severe recently, and the prices of commodities in the third quarter reached the highest point in nearly two years. The cost of steel and aluminum will slightly decrease in the fourth quarter. If the prices remain high, the range of product price adjustments will be limited. The transportation cost has decreased recently.

Q: Is Tesla integrating with other companies under a unified framework?

A: There is business relatedness, but the overlap is not strong, so Tesla has no plans in this regard in the short term. As for Twitter, it is obvious that I and other investors are now offering too high a price for Twitter. In my opinion, the long-term potential of Twitter, in terms of orders of magnitude, is greater than its current value.

Q: What is the progress of the 4680 battery?

A: In terms of progress, the company has a detailed timetable for the 4680 battery from now to 2026. Although it still faces challenges, I believe that the company's team can solve them one by one, and I believe that the 4680 battery can achieve stronger competitiveness.

In terms of products, in order to improve performance, the 4680 battery will be iterated constantly rather than remaining unchanged.

In terms of applications, both performance and choice will be considered when using the 4680 battery. At present, the Semi does not use the 4680, and the MY produced in Texas will be equipped with the 4680. Cost-wise, the company is striving to streamline processes, increase efficiency and make systematic adjustments with the hope of further reducing battery costs.

In terms of logistics, although there has been some improvement in shipping and truck transportation over the past six months, the situation is still challenging.

Q: How does AI factor into commercialization?

A: Tesla will achieve 100% FSD, and AI and supercomputing are crucial to the company. In the future, there will be further developments, and the reliability of current technology will be demonstrated to regulatory authorities. FSD is constantly improving, and neural network training is underway. The current architecture is correct and can bring greater value to the product. In terms of competition, we can compete with NVIDIA graphics processors, and the DOJO team believes they surpass NVIDIA in neural network training.

Risk disclosure and statement of this article: Dolphin Analyst Disclaimer and General Disclosure

Tesla Memo: "Gasoline cars will die, never reduce production at any time"