Tesla earnings disappoint and the future looks bleak

If you were wondering what makes a stock go up or down before this week, try getting your head around this one.

Tesla reported its first-quarter earnings this week during an incredibly shaky moment for the company in which sales numbers and the stock price have both fallen. Against this backdrop, Tesla reported $1.1 billion in net income on $21 billion in revenue, down 9 per cent from $23.3 billion at the same time last year.

The company’s profits, once the envy of the auto industry, are at their lowest in six years thanks to rampant price cutting and slowing demand. Earlier this week, the company approved its latest price cuts for the US, China, and Germany (all major markets for the EV maker).

Tesla’s Q1 operating margins are 5.5 per cent, down from 11.4 per cent in Q1 2023. In a call with investors, the company’s CEO, Elon Musk, blamed an industrywide shift from battery-electric vehicles to hybrids.

“We prefer the industry to continue pushing EV adoption” (not hugely surprising).

“EV adoption rate globally is under pressure and a lot of other auto manufacturers are pulling back on EVs and pursuing plug-in hybrids instead,” Musk said. “We believe this is not the right strategy. And electric vehicles will ultimately dominate the market.”

This quarterly report is full of red ink. Total automotive revenues are down 13 per cent year over year. Operating expenses are down 37 per cent. Net income attributable to common stockholders has slid 55 per cent. The company has literally negative free cashflow of $2.5 billion, meaning there is no cash left over after meeting Tesla’s operating, capital, and adjusting for non-cash expenses.

The company’s vehicle inventory rose to 28 days from last quarter’s 15 days. That’s a sharp increase and a sign of Tesla’s struggles with cooling demand.

Musk faced pointed questions from investors on these numbers as well as recent reports that the company has paused development of a new low-cost “Model 2” electric vehicle that was expected to come in at $25,000. Musk reportedly delayed the project, preferring to go “balls to the wall” on Tesla’s forthcoming robo taxi, which is expected to debut in August. Investors had pinned their hopes on the Model 2 to spur the company’s next wave of growth.

“Introduce new and more affordable products”.

In the shareholder note, Tesla made no direct reference to the Model 2 but said it’s focused on leveraging its existing manufacturing footprint to “introduce new and more affordable products.”

“We have updated our future vehicle line-up to accelerate the launch of new models ahead of our previously communicated start of production in the second half of 2025,” the company states. “These new vehicles, including more affordable models, will utilize aspects of the next generation platform as well as aspects of our current platforms, and will be able to be produced on the same manufacturing lines as our current vehicle line-up.”

Musk largely dodged questions for more specifics on affordable EVs, promising to reveal more details later this year during an event to reveal the company’s robo taxi. He did speak at length about a variety of other topics, including autonomy, batteries, and even aliens!

Earlier this year, Tesla reported lacklustre sales numbers in a sign that cooling demand for EVs and rising competition were taking their toll on the company. Tesla said it delivered 386,810 vehicles in the first three months of the year, an 8.6 percent drop compared to the first quarter of 2023. The company had earlier predicted slowed 2024 growth as it prepared to begin new vehicle production in 2025.

Soon after, the company said it would lay off 10 per cent of its global workforce, or about 14,000 people. Bloomberg reported that the layoffs could ultimately reach 20 per cent of the company’s employees.

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Here’s what happened next (and the reason that financial commentators gave for it)

The stock jumped over 10% in extended trading after CEO Elon Musk told investors that production of new affordable EV models could begin sooner than expected.

What? That’s what ‘investors’ took from the call and the earnings release. Let’s go back to the facts and see if we can see why this might seem like a buying opportunity.

Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

• Earnings per share: 45     cents adjusted vs. 51 cents expected.
• Revenue: $21.30 billion vs.     $22.15 billion expected.

Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago.

The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024.

Musk said on the call that the company plans to start production of new models in “early 2025,” after previously expecting to begin in the second half of 2025. Musk also touted Tesla’s investments in artificial intelligence infrastructure and said the company is in talks with “one major automaker” to license its driver assistance system, which is marketed in the U.S. as the Full Self-Driving, or FSD, option.

However, in its shareholder deck, Tesla reiterated a pessimistic outlook for 2024, telling investors that the “volume growth rate may be notably lower than the growth rate achieved in 2023.”

The only real explanation is that the company's share price is down over 40% already this year and at some point, it had to bounce. Maybe some buyers just think all the bad news is now out..., and for now, maybe it is, but there will almost certainly be more.

So let’s see if it being down 40% already makes it cheap.

To put things into perspective, Tesla is still the largest car manufacturer by market cap, yet doesn't even feature in the top 10by revenue.

Top 5 biggest car manufacturers by revenue:

1.       Volkswagen                               £256billion

2.       Toyota Motor Corporation       £230billion

3.       Ford Motor Company               £140billion

4.       General Motors                         £136billion

11. Tesla                                                          £77billion

(source: companiesmarketcap.com revenue 2023).

Top 5 biggest car manufacturers by market capitalisation:

1.       Tesla                                                     £420billion

2.       Toyota Motor Corporation       £245billion

3.       Porsche                                     £70billion

4.       Mercedes-Benz                        £67billion

5.       BYD                                            £64billion

(source: companiesmarketcap.com)

Which part of this looks cheap? The only explanation for an expensive stock is expected future growth, but the company isn’t growing. Revenue DECREASED and it is expected to decrease further. Yes, Tesla is cheaper now than it was at the start of the year, and many will say that’s a buying opportunity, but given the data, does it really look like an opportunity?

Some will argue Tesla does more than just make cars, but not according to its earnings where roughly 90% of current revenue is from selling cars.

 Could investors be jumping on the back of something Elon Musk has said ‘might’ happen sooner than he had previously said?

The only thing I would believe from what Musk said on the call after the earnings, is that revenue is down (because it’s a fact), profit is down, operating margins have halved, and volume growth will be notably lower than last year.

The rest is speculation from the man who (lyingly) stated he had secured funding to take 'Tesla private at $420', tweeted he would donate $6 billion to end world hunger (then didn't), said he was 'buying Coca-Cola to put the cocaine back in’, and made his dog the CEO of Twitter.

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