- Tesla shares sink on weak results and cautious guidance.
- Margin sacrifice is helping volume and the long-term outlook for profitability.
- Analysts are cautiously optimistic as the company navigates the margin-vs-volume highway.
Tesla (NASDAQ:TSLA) shares are skidding lower after the Q3 earnings report and may fall further. Near-term headwinds, including an intensifying price war, cut into results and the outlook for profits but did little to undermine the longer-term story. Tesla is still in its early phases, ramping up production and building its network.
While near-term headwinds persist, the long-term outlook includes continued dominance of the EV market. Among the many irons in the fire, and a cause for today’s price weakness, is the Cyber Truck, which Elon Musk says is the company’s best product ever.
Tesla is Still Growing; Growing Pains are Part of the Game
Tesla is a dominant force in EVs, and 1 that is still growing. The company’s top and bottom line results were weak relative to the analyst consensus but include near-10% top-line growth despite scheduled shut-downs for plant maintenance and upgrades. Deliveries, down YOY due to tightening consumer conditions, still topped 435,000, with production aligned with the full-year guidance.
Details from the conference call are also favorable to the stock price trajectory. Mr. Musk reiterated the company’s goal of 50% CAGR and said efforts are underway to ramp production to that level. Among the efforts to reach the goal are plans for a new gigafactory in Mexico. The plans were first unveiled in February 2023 and have since advanced.
The latest news is efforts to build local infrastructure to support the factory, which is expected to begin production in 2026.
Tesla is Profitable; Profits will Continue to Flow
The biggest story coming out of the Tesla report is the margin. Margins contracted severely due to higher costs and lower realized prices, but there is a silver lining. The company has lowered its prices several times over the last year to retain and grow market share, and the efforts are working. The company can stick to its full-year production targets, and it will make money doing so. Other factors impacting profits are costs to ramp up Cyber Truck production and investment in AI, which will aid cash flow over the long term.
While adjusted earnings were nearly 1000 basis points below the consensus estimate for the quarter, they are sufficient to keep the company on track to reach the analysts' consensus for the year. Analysts expect $3.07 for 2023, leaving $0.65 to be earned in Q4, historically the company’s strongest earnings quarter.
The Cyber Truck: Deliveries to Begin this Year
The Cyber Truck is 1 of Tesla’s long-shots and has been in the works for years. The Q3 report includes timeline updates, including production starting this year. The first deliveries are expected in November and will ramp over the next year. Mr. Musk thinks they’ll hit full production in early 2025, about 250K trucks annually, or about ⅓ of Ford’s F-150 sales in 2022.
The bad news may be caution on the side of Mr. Musk, that Cyber Truck production won’t be free cash flow positive for the next 12 to 18 months. In his words, the Cyber Truck is a special product that takes time, money, and effort to bring to market and make money.
Tesla has a Solid Balance Sheet
Tesla’s balance sheet is rock solid and does not indicate impending doom, far from it. The company’s leverage remains ridiculously low for an EV OEM, and the cash position is growing. Cash is up 10% sequentially and 24% YOY due to financing activities that leave total debt relatively flat compared to last year and debt net of product financing down. Regarding liquidity, the company has more than $26 billion in cash and investments, sufficient to sustain its product ramp and expansion plans.
Analysts Are Optimistic Despite Lowering Targets
The analyst chatter is cautiously optimistic. The takeaway is that near-term headwinds will impact margin, but the trade-off is long-term gain. Analyst Dan Ives of Wedbush pointed out the balancing act between margin and volume as a headwind but maintained his Outperform rating.
Wedbush’s new price target is $310, down $40, but still well above the consensus estimate. The consensus of 36 analysts is Hold with a price target near $240. That target assumes the stock is fairly valued following the post-release decline; Wedbush’s $310 target is about 30% of upside for the market. The takeaway for investors is that TSLA's share price may fall over the next few weeks or months, but the bottom is close.