Tesla is outdoing the competition amid supply constraints
By Peter Garnry, Head of Equity Strategy, Saxo Bank
Tesla is just outdoing the competition with record profits and revenue growing 81% y/y despite supply constraints. The carmaker's gross margin is now solidly the best in the industry, but part of that lead is from selling its autopilot software for $12,000 a piece which boosts gross margin. While Tesla's investors are pleased with the result and the outlook for deliveries to continue growing around 50% annualised in the coming years, a potential NHTS crackdown on the autopilot system is a major risk to profitability as Tesla is betting software will drive profit growth in the future.
Tesla’s Q1 2022 results have hit a new record with revenue at $18.8bn vs est. $17.2bn up 81% y/y and gross margin hitting 29.1% vs est. 25.8%. Free cash flow hit $2.2bn vs est. $672mn with free cash flow at $7bn over the past 12 months translating into a free cash flow yield of just 0.7.
Here are the key takeaways from the Q1 results:
- The automotive segment gross margin hit 32.9% vs 28.4% expected expanding to levels not observed before in the global car industry. The chart below shows the quarterly gross margin for some of the largest global carmakers and it is clear that Tesla is doing something very differently when it comes to operational efficiency. The lead on gross margin points to the fact that Tesla is leading the global car industry.
- Tesla said that profits will increasingly be tied to software, which is currently the autopilot software package, and it should be said that autopilot software sales is likely the majority of the difference in the gross margin as the autopilot software is costing $12,000 after its recent price hike.
- Tesla is reiterating its previous guidance of 50% annualized growth in vehicle deliveries which in a few years will take the company into the very top of the ranking in terms of annual car production.
- Tesla managed to deliver record gross margin and profits despite serious supply constraints and the lockdowns in China is a key risk to production in its Chinese market. The carmaker expects supply issues to persist for the rest of the year.
- Musk said on the earnings call that they are working on Robotaxi and says it could come as early as 2024. We think investors should downplay this opportunity as Tesla will face increasing competition and will likely spend its time on upgrading designs of existing models to keep demand growing.
- Tesla saw its solar deployment fall 48% y/y due to import restrictions.
- The carmaker is expecting to increase EV battery plant in Nevada and capital expenditures are currently above recent estimates.
The quarterly result should for now mute the sceptics on Tesla, but in classic Musk style the supply issues were brushed aside as a concern not something that could impact deliveries. This is potentially a dangerous expectation game to play with investors as it would seem unlikely that Tesla can continue to escape supply issues compared to the competition as the company has broken through the 1 million annual car production figure.
Another key risk to be aware is related to Tesla’s autopilot software. In an Bloomberg article it was highlighted that regulatory scrutiny of Tesla’s autopilot system is increasing and a severe crackdown or ban of selling it could severely impact profit growth at Tesla. This is probably the main risk Tesla investors are facing today.
