Tesla Succumbs To The Reality Of The Market In Q3 Results

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Tesla’s Q3 results really shouldn’t have surprised anyone. Like the Model X before it, the upcoming Cybertruck is taking longer than originally announced to reach production. This was one of several topics during the Tesla Investor Relations (IR) call on Wednesday that unsettled shareholders, who aren’t used to double-dipped reporting weaknesses. Tesla has not missed the mark on both earnings and revenue since Q2 2019.

• Q3 2023 Earnings: 66 cents per share adjusted vs. 73 cents per share expected
• Q3 2023 Revenue: $23.35 billion per share vs. $24.1 billion expected

Were Q3 expectations overly optimistic? Probably.

Was the subdued tone to the IR call unsettling? Absolutely.

Could CEO Elon Musk’s focus on affordability and relatively high interest rates be instructive rather than discouraging, visionary rather than morose? Yes, certainly. But that’s not Mr. Musk’s way, and, so, Tesla shareholders are a bit down (me included). But is there a glint of hope within Tesla’s acknowledgement of the reality of the market? You know it.

The amount of macroeconomic pessimism from Musk and his management team was striking, according to Bloomberg, “though not a total shock.”

The expectation: Tesla would grow 50% annually for several consecutive years.

The process: The company doubled its number of auto assembly plants.

The reality: The company failed to meet expectations in 2022 and won’t meet that pace again this year. Furthermore, projections for 2024 won’t hit that rate yet again.

A series of issues contributed to the dour tone of the Q3 IR call.

• Factory idle time had an impact.
• Overall uncertainty permeated the macroeconomic environment.
• If interest rates don’t drop, affordability will remain an issue for many potential Tesla buyers.

Some areas of uncertainty were left without full explanations from Musk and team.

• Tesla may be hitting the law of large numbers on some of its products.
• Cost per vehicle is coming down in future quarters.
• Timing for building the factory in Mexico isn’t set.

What were some positive notes that emerged from the call?

• Megapack deployment was a key driver of the energy division’s margins.
• Better rate of vehicle cost improvement.
• Tesla finished factory upgrades late in Q3, so volume should go up.
• Cost reduction efforts will prove efficacious.
• The company continues to be rigorous about improving the quality and capability of the car.
• If interest rates start coming down, Tesla’s volume will accelerate.

The Elephant in the Room: Lower Pricing Sells More Teslas

Musk expressed real empathy throughout the IR call for lower middle class individuals who may want to join the Tesla family but cannot afford “incentives like the tax credit and whatnot.” He described “a large number of people are living paycheck to paycheck. And with a lot of debt.” He went on to depict possible Tesla consumers who “can’t front $7,500 for 18 months or even 6 months to get […] the tax credit, and they actually don’t in some cases even have that $7,500 in taxes.”

Musk later noted: “I just can’t emphasize enough how important cost is. … We have to make our products more affordable so people can buy it.”

When asked if he could share the timing of the next-gen product, Musk answered quickly, “Not at this time.” A different answer during the IR call could’ve really sparked Tesla excitement.

If we look back at May 2023 and Tesla Investor Day, analysts were giddy with anticipation about Master Plan 3. Most were certain that a low-cost Tesla Model C would be next for the company. Such an affordable model could have broadened the company’s appeal, headed off growing competition, and secured Tesla as the model automaker to lead the way to zero emissions.

But it wasn’t the direction that the Tesla board, led by Musk, wanted to go, and so the IR call focused primarily on the Cybertruck, Full Self Driving, advertising, robotaxis, radar, and price elasticity.

Cybertruck: Musk was insistent that he wanted “to temper expectations for Cybertruck. It’s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.”

Full Self Driving: In prepared remarks to start the session, Musk summarized the state of the Full Self Driving (FSD) program. “Autopilot and AI, our vehicle has now driven over 0.5 billion miles with FSD beta, full self-driving beta, and that number is growing rapidly. We recently completed a 10,000 GPU cluster of H100s.”

Advertising: “We are advertising,” Musk commented, adding, “there is something to be gained on the advertising front.” Yet he qualified his affection for advertising by saying, “Informing people of a car that is great but they cannot afford doesn’t really help. So, that is really the thing that must be sold, is to make the car affordable, or the average person cannot buy it for any amount of money. They can’t afford it.”

Robotaxi: “I guess I’m very excited about our progress with autonomy, the end-to-end, nothing but net. Self-driving software is amazing, drives me around Austin with no interventions. So, it’s clearly the right move.”

Radar: “We have radar as — a Tesla-designed radar is an experiment in Model S and X. That’s it. We’ll see whether that experiment is worth it, but there are no plans to integrate radar into 3 or Y.”

Price elasticity: “I think that there’s very significant price elasticity. … So, I just can’t emphasize again how important cost is — it’s not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable that people can buy it. And I keep harping on this interest thing, but I mean, it just raises the cost of the car.”

Tesla Isn’t Alone in the Automotive Marketplace in Reduced Volume

Tesla is clearly not the only automaker to struggle in a stagnant EV marketplace. In fact, General Motors & Ford announced they would slow anticipated EV production. Volkswagen has reduced the output of electric cars at its German factories and has cancelled plans to build a new $2 billion factory in Wolfsburg. Volta Trucks didn’t get much beyond the startup stage and filed for bankruptcy.

So, right now for Tesla, it’s all about lining up demand in sync with production capacity. That doesn’t point to expansion in the near future. Essential focus will be on increasing efficiency on existing lines.

“I’m not saying things will be bad,” Musk said. “I’m just saying they might be.”

In closing remarks, Musk acknowledged that his pessimism filtered through the IR call. “If anybody’s got any good guesses on this, I’d love to be less wrong. And I apologize if I’m perhaps more paranoid than I should be because that might also be the case because I am — I have PTSD from 2009 big time. And 2017 through 2019 were not a picnic either. That was very tough going. So, the auto industry is also somewhat cyclic because people can’t hesitate to buy a new car and if there’s uncertainty in the economy. So, its product companies do very well in good economic times, and they don’t do as well in tough economic times.”

Being at the top is lonely. Tough times require persistence and vision, which Musk has long shown. The economy may be proven to be more resilient than reports are indicating, and political winds change people’s attitudes quickly. The Q4 results will be a strong indicator if Tesla can sustain its hold on the EV marketplace and its allure among stockholders.

Thanks to the Motley Fool for sharing their transcript of the Q3 IR call.