The global EV market has entered a cutthroat, even Darwinian competitive dimension now that Tesla (TSLA) has initiated a price war to capture market share, though a plunge in gross margins is the blood sacrifice for market dominance. So TSLA’s Q1 earnings were a predictable horror, with a fall in operating income/margins after successive price cuts. Tesla can succeed in this strategy in the US because it sells more electric cars than all its rivals combined, from GM/Ford to VW/Toyota. China is a different story where BYD sells more EV units but comparing a $11,000 schlock BYD electric clunker to a sleek Model Y is insane. Unlike its rivals, Tesla has far higher margins and better economies of scale with its 1.8 million deliveries.
After all, the average selling price for a Tesla vehicle is now $46,000, down from $51,400 three months ago. As Musk said, the strategy is now to focus on higher volumes and a larger fleet, even at the cost of erosion in the industry’s highest margins. Wall Street has given an initial thumbs down to TSLA as the shares have tanked to 168 in the pre-market as I write. It did not help that Tesla’s CFO did not provide a credible financial projection for 2023, citing “economic uncertainties” on the earnings call.
The Cybertruck hype will not help the shares for now as it will not be on the road in large volumes until at least Q2 2024. Apart from a fall in margins, Tesla has also damaged its relationships with existing car owners who now face steep falls in the resale value of their Model 3 and Model Y SUVs. This is a bad moment for a price war since EV demand has been hit by rising interest rates and a potential global recession.
The recent fall in EV related commodities demonstrates that the industry faces slack demand and Tesla cannot remain immune from overall macro/EV demand softness. So it will be impossible for them to accelerate revenues and boost operating margins in 2018 even if they meet their 1.8 million unit delivery target. Tesla managed to raise deliveries by 100% CAGR in the past 3 years despite the pandemic and supply chain disruptions. So I have no doubt that it will meet its 1.8 million unit target for 2023, up from 1.3 million units in 2022. Production ramp ups in the Berlin and Austin gigafactories will unquestionably help generate a 33 to 35% rise in deliveries and the Cybertruck launch will be the icing on the cake.
While automotive revenue growth cannot possibly match stellar 51% growth in 2022, I do not believe the price cuts will destroy the Tesla cult and thus its nosebleed valuation on Wall Street. The energy generation/storage business is also on a roll and the new Shanghai battery factory could be a game changer in the PRC market. Tesla has also slashed its long term debt and its low balance sheet leverage can help drive high octane growth in 2024. My buy/sell range for TSLA is now 150 to 185.
Also published on Medium.
