Tesla's Tough Year: Is the Situation Really that Dire? - 2023/01/04
An in-depth analysis of Tesla's financial, quantitative, and technical performance.
👋Hey guys,
I appreciate the feedback I got from some of you and will incorporate it from now on. As I continue to grow, I want to make my writings feel like a journey for you - The Seeker.
"There is no end to education. It is not that you read a book, pass an examination, and finish with education. The whole of life, from the moment you are born to the moment you die, is a process of learning." - Jiddu Krishnamurti
In today’s edition, I will be delving into the current state of Tesla and sharing the research process with you. The company had a rough year so far and is down 65% Y/Y but I am curious about what is happening behind the curtains and what is the true state of the carmaker.
I hope you are as curious as I am, so let’s get into it.
What can you expect?
We will examine the Automotive Industry and its performance over.
We will dive deep into the fundamentals and rigorously examine the Balance Sheet, the Income Statement, and the Cash Flow Statement.
We will do Quantitative Research based on alternative data and our proprietary models.
Technical Analysis of the price action and possible patterns or formations.
First, a couple of words about the company.
Tesla, Inc. is a company that designs, develops, manufactures, leases, and sells electric vehicles and energy generation and storage systems. The company has two main business segments: the Automotive segment, which includes the sale of electric vehicles and regulatory credits, as well as vehicle financing and leasing, after-sales services, and vehicle insurance; and the Energy Generation and Storage segment, which includes the design, manufacture, installation, and sale of solar energy generation and energy storage products and related services to residential, commercial, and industrial customers and utilities. It was founded in 2003 and is headquartered in Austin, Texas. At the time of writing this article, TSLA 0.00%↑ price is exactly 108.40$.
🏭 Industry Overview 🏭
For the industry analysis, we will use the CARZ 0.00%↑ ETF which is focused on the global automotive industry.
The snap below clearly shows the rough year both Tesla and the industry had over the past year.
A lot of this was a result of the high-interest rates, supply chain problems, and recessionary fears in 2022.
Currently, the prevalent fear on Wall Street is that the supply shortages could quickly turn into a “demand destruction” scenario as production is finally ramping up.
“There is active demand destruction in the industry, given inflation, interest rates, and energy costs − but so far, this has mostly impacted the backlog,” Bernstein analyst Daniel Roeska wrote in an investor note earlier this month.
However, the Automotive Manufacturing industry is currently valued at $2.9 trillion and is experiencing growth at a CAGR of 3.1%. This comes after a period of decline where the market saw a drop of 0.6% between 2017 and 2022, which was faster than the decline of the overall economy due to the impact of the Covid-19 pandemic. Nevertheless, the industry is expected to continue growing at a CAGR of 3.71% from 2020 to 2030, with a projected 122.83 million units by the end of the decade, representing a significant increase from 85.32 million units in 2020. As of now, the automotive manufacturing industry is the largest of all global manufacturing industries in terms of market size.1
Going forward I think the industry will be impacted by various disruptive trends including diverse mobility, autonomous driving, electrification, and connectivity, due to the current shift toward digitization and innovative technology. This is expected to result in a move towards shared mobility, with one in ten cars sold in 2030 being used as a shared vehicle. However, unit sales are still expected to grow, albeit at a slower rate than in previous years. It is also predicted that by the end of the decade, around 15% of new cars sold will be fully autonomous, though there are technological and regulatory barriers to overcome first. The rise of electric vehicles will also require manufacturers to adapt their processes for production. While the shift towards electric is being driven by the need to address climate change, it is expected to happen gradually.
📋 Financials 📋
Going through the company financials we can see that Tesla is on a record year. The revenue is through the roof, netting a 56% YoY change in Q3 to $21.5B. This was driven by the growth of vehicle deliveries, increased ASP YoY, and growth in their other parts of the business.
Revenue by Business Unit
Automotive Unit - $18.7B
Energy Generation and Storage - $1.1B
Services - $1.6B
Okay, having higher revenue is good, but what does that translate into?
The cost of revenue is almost flat. This hints to a well-established operations, consistent production levels, and effective cost control.
Digging deeper into costs for the overall industry something very peculiar came up. The below graph shows the Research & Development Expenses.
Tesla is sitting comfortably at the bottom of the pack. However, this can be a double-edged sword. Why?
Well, one thing is that obviously they are selling a lot of cars, and the competition has to catch up in terms of model variety and supply. Some are still investing in prototypes and are far away from hitting the market.
On the other side, if the company is not investing much in new technologies and innovation, it may get left behind, and in the mid-to-long term, the well-established combustion engine behemoths will get their share of the market.
💰 Profitability? 💰
The operating income improved YoY to $3.7B in Q3, resulting in a 17.2% operating margin. That put the company in industry-leading operating margin2, despite the raw material cost inflation. The Automotive GAAP gross margin is sitting at 27.9% in Q3.
Despite aiming for 50% year-over-year growth, Tesla's vehicle deliveries fell short, totaling 1.31 million for the year. However, the company did see an increase in both vehicle deliveries and production in 2022. Vehicle deliveries rose by 40% from the previous year, while production increased by 47% to reach 1.37 million. But while their production continues to grow, it has become more difficult and costly to secure sufficient transportation capacity during peak logistics times. In order to address that, in Q3 the company started producing a more balanced mix of vehicles for different regions each week. This resulted in a higher number of cars in transit at the end of the quarter.
All this resulted in a very cash-rich Tesla!
The operating cash flow went strong, as a result of the record production and delivery numbers.
The current cash, cash equivalent, and short-term marketable securities increased to $21.1B in Q3 driven mainly by a free cash flow of $3.3B. However, some of this was offset by debt repayments.
Speaking of Debt, the company is sitting on the least amount of debt it has had. That’s good news given the macro conditions and the increasing interest rates.
🚨Risk Factors🚨
Due to the global COVID-19 pandemic, the company may experience challenges related to macroeconomic conditions. This could include delays in launching and increasing production, difficulties in controlling manufacturing costs, and problems meeting projected construction timelines and ramping up production at new factories. Also, challenges in expanding global product sales, servicing and vehicle charging networks, and maintaining and increasing access to battery cells are on the table. Additionally, the company must contend with strong competition and relies on consumer demand in a competitive, cyclical, and volatile industry.
Funny enough one of the risk factors the company stated in their 10-Q reports is ——> Elon Musk!3
He can definitely be a blessing and a curse, and with his recent focus on Twitter, Tesla may get left behind.
Valuation Models:
I will be using my 3 proprietary fair value models to estimate the intrinsic value4 of the stock. In these models, I take into account the historical growth rate of each metric as well as the latest reported value. The models are as follows:
Price-to-Earnings model
Free Cash Flow model
Sales model
The average fair value of all three models is estimated to be 203$ however there is a big gap between the Price-to-Earnings Fair Value model and the Free Cash Flow and Sales models. The PE model value is way off and I wouldn’t trust that one too much, however, the FCF and Sales are pretty interesting. Both models predict a price around the current stock price of 108$, which might mean we are nearing a potential equilibrium. However, it is still early to make any conclusions about that. Nevertheless, the PE model may indicate a potential rebound, because Tesla’s recent leg down overextended heavily.
👨💻 Quants 👨💻
The analyst rating looks good across the board. The majority agree that currently, the stock is a “Buy” while some still insist on a “Hold” position.
* The grading scale is as follows: 1 - “Strong Sell”, 3 - ”Hold”, 5 - “Strong Buy”
💸 Dollar Flows 💸
Since September the stock saw significant outflows5 eight times, which is in line with the recent price action. Obviously, a lot of money is flowing out of the stock. However, in late December things were kinda mixed, with two days of significant inflows and two days of significant outflow. This may be seen as a sign of a potential new equilibrium forming.
🕵 Insider Transactions 🕵
Insider Transactions were all over the place. Elon Musk leading the pack, selling more than $3B worth of stocks through November, and December. Topping at the week ending 18th of December, when 5% of total owned shares were sold. It can be alarming when the insiders are selling part of their stake.
🏛 Institutional Investors 🏛
On the Institutional Investors’ side we can see some movements as well. Vanguard Group has been rising its stake and currently are owning a little above 6% of the company.
State Street Corp too, went on buying and is now owning 2.9% of all Tesla stocks.
Well if smart money is going into the company this could mean only one thing. They are positive about the future of the company and the price.
📈 Technicals 📈
Okay, let’s check the Price Action of Tesla and see what’s happening there. For the last 3 months, it has been nothing but a downfall. The price is still looking for a support level and for some bulls to come in, but I am still hesitant to talk about a bottom.
The Relative Strength Index is deep into the oversold area. It tried to cross above the 30 level however without success showing early signs of a potential reversal.
Historically we have never seen such momentum to the downside, not even in the March 2020 Covid selloff (as shown below). The sellers are maybe getting exhausted around this level and a rebound to the upside is maybe on the table.
Conclusion
Overall the Automotive industry had a bit of a slowdown, but it is still the biggest manufacturing industry one worldwide and with perfect prospects for the future. Tesla suffered a rough year, but the company is reporting one if not, the best year so far. With a record revenue, operating margin, and free cash flow. The analysts are positive for the future and the institutional investors are acquiring more given the current price.
For now, I will hold and watch closely how the price action plays out. I will look for consolidation and a support level forming and only then think about getting in.
Well, that’s all from me guys.
I would love to hear what you think about the company and its future prospects.
⬇⬇ Please do share your thoughts in the comment sections below. ⬇⬇
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🙋♂️ Cheers! 🙋♂️
Disclaimer: Please note that the information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. The information provided should not be relied upon as a substitute for financial, legal, or professional advice. Before making any decision, it is important to consider all relevant information and consult with a professional who can provide personalized advice based on your specific circumstances. The author and publisher of this article cannot be held liable for any actions taken based on the information provided. This is not a recommendation to buy or sell any specific securities or financial instruments.
https://finance.yahoo.com/news/global-automotive-market-analysis-outlook-100300546.html
Among all volume OEMs, based on the latest available data
Page 49, of 20220930 10-Q Report. https://ir.tesla.com/_flysystem/s3/sec/000095017022019867/tsla-20220930-gen.pdf
Intrinsic value, also known as "intrinsic worth" or "fundamental value," refers to the perceived or estimated value of an asset, investment, or company based on its inherent characteristics and underlying fundamentals.
Significant Outflow or Inflow is when the given day Dollar Flow is bigger than two standard deviations