Tesla's story is being reshaped, and the time has come to test faith!

$ Tesla.US announced its Q4 earnings report in the early morning of January 26th Beijing Time. The highlights are as follows:

**1. Gross margin: A choice between issues of selection or competition?**Except for the fatal blow of auto sales disclosed earlier, the Q4 performance seems to be below expectations on a large scale, but only one auto sales gross profit rate is really poor. From the perspective of single-car economics, the key is car unit price, followed by raw material and transportation costs, and the cost reduction brought by large-scale car production is still clearly visible.

From a sustained point of view, there is no hope for unit prices to increase and one can only observe how much profit from material savings and economies of scale can hedge against the decline in unit prices. Without a complete hedge, Dolphin Analyst estimates that Tesla's car sales gross margin this year may drop to a level close to that of BYD, around 16-18%, and the upward margin can only be achieved by the lowering of the price of lithium carbonate, the depreciation of the US dollar, and the monetization of software, provided the sales volume remains unchanged.

2. Energy and services are improving: The increase in volume for the energy business has led to large increases in growth and gross profit margins, and the service business is rapidly growing due to the increasing number of parked Dolphin cars on the roads. Services such as repairs, maintenance, and charging are all growing, and although the second-hand car business has fallen from its high price point, it still showed some support in the Q4, and therefore the performance of the service business from revenue to gross profit margin is also good.

3. Economies of scale are still in effect: Although the gross margin on car production has marginally declined, the economies of scale in research and development and sales are still present. Under large-scale sales, the growth in R&D and sales is basically stagnating, and the operation side is continuing to release profits.

4. The time has come to test faith: These three problems combine to form a moment that tests the market's faith because this time Tesla has given very clear expectations for both the long and short term:

a. Short-term car sales fluctuation: By 2023, the car price per unit will be 47,000 US dollars and the car sales will be 1.8 million units.

b. Long-term "hard" story remains unchanged: 50% compound annual growth rate of automobile sales remains unchanged, and the target gross profit margin of car manufacturing will remain at a level above that of competitors.

c. "Soft" story begins: FSD Beta confirmed revenue of over 300 million for this quarter, and the company currently has short-term deferred income of 1.7 billion on its books, more than 10 billion of which is related to FSD and still pending confirmation. The company has also stated that the long-term gross profit margin can be compensated by monetizing high-margin soft services such as FSD and in-car entertainment, which has a margin of up to 90%.

Overall opinion of Dolphin Analyst:

In the last quarter, Dolphin Analyst clearly stated that Tesla had shifted from a problem of supply to a problem of pricing decisions (refer to: "The Fatal Question: When demand is insufficient, how can single-car profitability be maintained?"), and emphasized that under these circumstances, the best strategy for investing in Tesla is avoidance. Afterwards, Tesla's sales continued to be hit hard, with rumors of factory shutdowns, global price cuts, and the stock price plummeting due to Twitter dragging it down.

"After this earnings report, the Dolphin Analyst believes that the moment has come to truly test the market's long-term belief in Tesla, after the full release of risks: the erosion of lithium carbonate on the gross margin of automobiles has been fully released, and Tesla's fearless and conclusive price reduction model has brought a market impact to its peers. In addition, the recent surge in orders and reservations has highlighted Tesla's power."

"Furthermore, in terms of short-term targets, the company has anchored its vehicle revenue range for 2023 through 180,000 vehicles priced at $47,000, and there is a high probability that there will be a super-low-priced Tesla listing in 2024. Whether it is gross margin or sales volume, Tesla has not lowered its long-term targets."

"If you believe that Tesla's technological advantages have not been affected during this process, the scale advantage brought by production is still there, and the company's path and goals are clear and achievable, then the low point of the stock price brought by short-term replacement cycles and macro-cycles will mean more opportunities than risks for long-term companions."

"According to the Dolphin Analyst's model, especially when Tesla falls below $100, it basically means certain opportunities. The increase in gross margin brought by FSD is more like an 'upward option.' In a weak recession, it is not difficult for the stock price to rebound by more than $200 in the neutral zone."

"Please be advised that this is an original article by Dolphin Investment Research, and it may not be reproduced without permission. After the earnings report, the content of the conference call will be provided immediately. Interested users can add WeChat account 'dolphinR123' to join the Dolphin Investment Research Group and discuss investment viewpoints."

Detailed analysis of the earnings report is as follows:

1. Overall: Story Remodeled

1.1 Price drop drags down revenue. Tesla's Q4 2022 revenue was $24.3 billion, an increase of 37% YoY. The revenue appears to be lower than Bloomberg's consensus estimate of $25.5 billion, but mainly because the market overestimated the sales of over 15,000 cars. The actual unit price of $53,200 was basically in line with market expectations. After the car sales figures came out, the overall revenue and volume of car revenue have been confirmed, and the stock price has already reflected the slump in sales and the subsequent pressure on gross margin caused by price cuts.

Meanwhile, energy revenue, service, and other revenue, as well as the gross margin of these two businesses, all exceeded market expectations. Therefore, behind this seemingly lower-than-expected revenue figure, "what is hidden is actually Tesla's relatively good performance in energy and service business."

1.2 Profit is not high enough, and the responsibility lies in price reductions. The operating profit was $3.9 billion in the fourth quarter of 2022, an increase of 50% YoY. However, it continued to decline from nearly 85% growth in the previous quarter. The key here is the decline in car gross profit margin. Even though the sales/administrative and R&D cost ratios are very good in terms of self-regulation + economies of scale, it still affects the realization of profit expectations.

Dolphin Analyst carefully analyzed the economics of a single car and saw clearly that the key issue is the rapid drop in car unit prices, which influences gross profit margins by business division, and because the energy and service businesses are performing well.

1.3 Lithium carbonate price increases + Tesla price reductions, a roller coaster ride of gross profit margin. As the most important observation index for each quarter, the company achieved an overall gross profit margin of 23.8% in the third quarter of 2022, a further decline from the 25% of the previous quarter.

The most crucial decline in automobile sales gross profit margin this quarter rapidly dropped from 26.3% to 23.8%, even lower than the low point of gross profit margin set in the second quarter of the Shanghai epidemic, and during the fourth quarter, it was mainly just a small price reduction in China.

Next, we will focus on examining what exactly affects the gross profit margin of cars from the perspective of the economics of a single car.

2. Will Tesla's automobile gross profit margin be as good as BYD's?

2.1 Is the price butcher coming?

a. When the supply and demand contradiction moves from supply to demand, both key variables will change - automobile sales and the ability to make a profit from selling cars. Tesla's poor sales without reducing prices have been seen, and the loss of gross profit margin is also a natural consequence of intensified industry competition and price wars:

This quarter, single-car revenue (including points, leasing vehicles) was $53,200, a decrease of $1,100 from the previous quarter. Although China's retail volume, which has a lower average price, accounts for a lower proportion of global sales, the price per car is still falling.

Dolphin Analyst, in combination with the company's depreciation and amortization expenses, can roughly estimate the per-car depreciation and variable costs. A single-car economy looks like this:

1.) The cost of a single car has actually increased by 310 yuan due to the decline in unit revenue and the increase in unit variable costs, despite the fact that the unit price has dropped by 1,100 yuan compared to the previous quarter (this is due to the appreciation of the U.S. dollar dragging down overseas revenue). The decline in unit revenue + the rise in unit costs resulted in a decrease in unit profits of 1,400 yuan compared to the previous quarter.

2.) From the perspective of cost rate, although the price per car has dropped, the cost of depreciation and amortization per car has dropped faster than the price per car. However, due to the increase in raw material prices, the variable cost rate of a single car has increased. 3.) Therefore, the biggest contributing factor to the rapid decline in gross profit margin of bicycles this quarter is the decrease in bicycle prices (which is due to both currency devaluation and markdowns), followed by a rise in raw material costs. As a result, the gross profit margin, with integral points included, is still at a record low of 25.5% for the second year in a row.

4.) Of special note is that this quarter Tesla rolled out FSD Beta to paid users (400,000 people) in North America, and Tesla owners in the United States and Canada can purchase Tesla's automatic driving services through either a one-time purchase or subscription. The more than 300 million dollars in deferred revenue generated by this service will be confirmed as income, with a gross profit margin of over 90%, which will further boost the gross profit margin and may even offset the impact of the 300 million dollars in currency depreciation that was not denominated in U.S. dollars. Furthermore, on the car's entertainment software, Tesla has added Zoom video conferencing and Apple Music music services in its latest update.

b. Gross profit margins have been declining all the way? Hope for the long term

Recently, there have been a number of news and rumors about Tesla cutting prices, suspending work at Shanghai factory, and refuting them. Amid this information frenzy, Tesla has actually drastically reduced prices.

After China lowered prices first, Tesla immediately cut prices by more than 10% as soon as the company entered 2023, with an average total cut of more than 60,000 yuan, while the global average gross profit per car for Tesla is converted into RMB to be about 100,000 yuan.

In the January wave of global price cuts by Tesla (with the final price cut on the Chinese market being the cheapest), the price cut in key regions - China, the United States, and Europe - for Tesla vehicles was mostly over 10%.

Dolphin Analyst roughly calculated that, on the basis of the fourth quarter's bicycle price of 53,200 yuan, the price drop was about 11%, making the first quarter's average bicycle price about 47,400 yuan (which is consistent with Tesla's official guidance of a 2023 average bicycle price of 47,000 yuan). If the depreciation of bicycles and variable costs remain unchanged, then Tesla's gross operating margin will drop rapidly to about 16%. In fact, BYD's gross profit margin was nearly at this level in the third quarter of last year.

Of course, due to the drop in the price of lithium carbonate from nearly 600,000 yuan per ton in the first quarter to below 500,000 yuan per ton, and because after the markdown, orders (Tesla claims that orders have doubled since the markdown) and sales have skyrocketed, the diluted cost may still not fall to the 15% level in the short term.

As for the long-term plan, Tesla has already stated that the new car platform is under development and is expected to be launched in 2024. The cost of the car will be only $20,000, so at a gross profit margin of 20%, the price of a single car should start at around 160,000 yuan when calculated in RMB. Tesla's next hope for a killer pricing product is approaching. On the guidance of long-term profit rate, Tesla has clearly stated that its profitability level allows it to achieve a level of superiority over its counterparts who focus on scale (PS, Toyota's gross profit margin is basically between 18-24%), which also means that Tesla hopes that the market can put its car gross profit margin above 25% in the long-term expectation, and the high point of this Tesla profit uptrend cycle is about 33% in a single quarter.

c. Low unit price and insufficient sales are dragging down automotive revenue: In the fourth quarter, the overall sales of automobiles and points totaled 21.3 billion US dollars, a year-on-year increase of 33%, which is mainly less than market expectations because the market overestimated sales by more than 15,000 vehicles.

Automobile leasing business revenue was 600 million U.S. dollars, a slight drop from the same period last year. However, since sales have been disclosed in advance, this auto revenue is basically within expectations and does not count as an expectation gap.

However, this quarter's regulatory points rebounded to nearly 500 million U.S. dollars, contributing 2.2% of total revenue and 12% of pre-tax profit, and basically remained at an average level in recent quarters.

2.2 Confirmation of car sales path-victory by scale.

When it comes to the moment when demand and cost are the main contradictions, Tesla has already presented its choice very clearly-taking advantage of its scale, exchanging car sales scale for car gross profit rate, and imagining space to increase the gross profit margin of its automotive business with the massive stock of cars, paid services, and traffic realization.

But the process in the middle is the fluctuation, coordination, and adjustment of production, sales, and gross margin rate. The implementation method is to reduce prices without reducing production, and update FSD and in-car entertainment services with a gross margin rate of about 90%.

a. The story of the fluctuations in the fourth quarter of last year began: Tesla's recently announced car sales volume was only 405,000, a year-on-year increase of 31%, which was 15,000 fewer than the market estimate at that time; resulting in the final sales volume for the whole year of only 1.31 million, a year-on-year increase of 40%.

b. As one of Tesla's absolute production centers and main sales areas, the Chinese market supported 77% of Tesla's global sales in the fourth quarter, again setting a new historical high, which is probably also the highest point that the Chinese factory can contribute, because the Shanghai factory will not expand production according to the plan.

Corresponding to the sales volume in the Chinese market, it only contributed 30% of global sales in the fourth quarter, mainly due to poor domestic sales due to market competition and user observation before Tesla's price reduction in late October.

Although Tesla lacks new cars and struggles to compete in the Chinese market due to the diversity of Chinese electric vehicle manufacturers, its position in Europe and the United States remains relatively stable, and sales in both regions are still rapidly increasing.

The change in delivery methods (in the last month of the second quarter of last year, deliveries accounted for 74%, which dropped to 64% in the third quarter and 51% in the fourth quarter) combined with a significant increase in production, has led to Tesla's automotive inventory turnover days rising to 13 days.

More importantly, at the end of the fourth quarter, Tesla's customer deposits continued to decline year-on-year and quarter-on-quarter, and did not stabilize due to the price reduction in the Chinese market.

Long-term sales growth target is still a compound annual growth rate of 50%: the market is most concerned about whether Tesla can maintain the annual sales growth target of 50%. The answer this quarter is "must."

Of course, this may be slightly different from Dolphin Analyst's understanding. The company explicitly states that the starting point for the 50% compound growth target is 2020, and the 2023 sales target is above 1.8 million units, corresponding to a year-on-year growth rate of 40%, which keeps the growth rate of sales volume from last year by lowering prices. This is basically consistent with Dolphin Analyst's model-based estimate.

As global production capacity is no longer an issue and domestic competition is fierce, with many high-volume producers exporting, it is necessary to consider the issue of diversified production capacity from the perspective of transportation costs and safety.

Tesla's latest production capacity plan:

Shanghai factory: It has been close to full production for several months, and the production capacity will not increase again in the near future. Currently, the Shanghai factory is still Tesla's global manufacturing center, supplying Tesla sales in most regions outside the United States. In other words, the originally rumored third-phase capacity expansion has basically disappeared, and only the current full production status is maintained. Judging from the sales volume of the fourth quarter, the weekly output is basically between 17,000 and 18,000 units.
New factories: 3,000 units per week

At the end of the fourth quarter, the weekly output of the Texas Austin factory had exceeded 3,000 vehicles, which was in line with expectations. At the end of the previous quarter, the weekly output was 2,000 vehicles. The weekly output of the Berlin factory at the end of the fourth quarter also exceeded 3,000 vehicles.

The weekly output of 4680 battery cells has reached more than 1,000 battery packs, and the electric truck Semi has also started trial production as scheduled, with the first delivery scheduled for December 2022.

Energy and Services: Getting Better

3.1 Abundant Energy

Tesla's energy storage and photovoltaic business includes selling photovoltaic systems and energy storage systems to C residential and to B small commercial and large commercial and utility-level customers. In the fourth quarter of 2022, revenue reached $1.3 billion, an increase of 90% year-on-year, and the gross profit margin has quickly increased to 12%, despite rapid revenue growth and installation shortages during the traditionally busy season in the summer.

In terms of growth, energy storage growth is relatively high, with an installed capacity increase of over 150% year-on-year, which is still in short supply. The California Megapack energy storage battery factory is still struggling to increase production capacity, while photovoltaic installed capacity only increased by 18% year-on-year.

3.2 Used Cars Depreciation, Slower Growth but Improved Gross Margin

In the fourth quarter of 2022, Tesla's service business revenue reached $1.7 billion, an increase of 60% year-on-year. The gross profit margin continued to be positive due to the active transactions in the used car market and the rapid growth in spare parts and pay-per-use supercharging services. However, the average transaction price of Tesla's used cars decreased rapidly in the fourth quarter, indicating a considerable short-term sustainability issue of used car business.