Written by: Sophie Lund-Yates | Hargreaves Lansdown
Fourth quarter revenue rose 37% to $24.3bn, a record for the group. Automotive revenues were up by a third to $21.3bn. There was a 44% increase in production, with Model 3/Ys making up the vast majority of the total. Total vehicle deliveries were up 31% to 405,278. The group said it’s planning to grow production “as quickly as possible” to reach the 50% growth target (on a compound growth basis). For the new financial year Tesla expects to produce around 1.8m cars.
Tesla’s average selling price (ASP) increased compared to last year, reflecting a more lucrative mix of cars being sold. This helped offset higher costs, which fed into a 49% increase in operating profit to $3.9bn. Despite the increase in profits, margins were tighter overall reflecting higher costs and recent price cuts. The group highlighted the uncertain economic backdrop and highlighted its ASPs have halved since 2017.
Tesla generated free cash flow of $7.6bn for the financial year as a whole.
Tesla shares were unmoved in after-hours trading
Following last year’s horrendous valuation pressures, Tesla investors are craving clarity and stability and this quarter has offered a dose of both. The reopening of China has unlocked the full potential of Tesla’s economies-of-scale once more, meaning production in the region is largely back in full swing. The share price rally since the start of the year has been largely linked to this, and progress hasn’t been dented thanks to Tesla’s record quarter.
It’s incredibly telling that Tesla is moving to make its vehicles more affordable. This enables the group to entice more customers despite inflation fears, and tempts them away from the competition who are largely at a lower price-point. This move also means more people buying Teslas would be able to claim the $7,500 federal tax credit for qualifying electric vehicles. In doing so, Tesla is looking to undercut more traditional car companies. Its ability to do this for a prolonged period remains to be seen, especially at the moment when a brand-new car isn’t top of the list while incomes are being eroded. Broadly speaking, competition remains a very real threat, especially in China. There is a lot of money being thrown at the EV market and it’s not impossible that Tesla will be overtaken. Tesla will need its foot to the floor if it wants to keep hold of, let alone grow, the market position it now resides in.
It’s also worth considering that infrastructure remains lacking in many markets. Tesla’s service infrastructure is notoriously lacking, so it may sell a lot of cars, but if those customers aren’t happy, they won’t come back for an upgrade.
The biggest remaining question mark surrounds governance sentiment. Elon Musk’s foray into social media leadership through the Twitter takeover has threatened to unpick a lot of confidence as investors fretted about Elon’s ability to lead both companies. Elon Musk’s ongoing fraud case is another distraction. The last thing serious investors want is to see their CEO in a witness stand. The worst of the damage is done but there’s likely to be little room for error or sentiment roulette for some time.
Tesla’s grand plan includes beefing out software revenue, in much the same way Apple customers become trapped in an ecosystem. This is a potentially highly lucrative move, but just like Apple needs to keep selling iPhones to make Services sing, Tesla needs to keep new cars rolling out its giant factories.
Ultimately, Tesla is firmly back on the road to growth and maintains an enviable market position. However, there are some clouds gathering on the horizon on both an economic and industry level. Both of those have the potential to seriously squeeze margins. Tesla’s plans to rapidly scale up output will only stimulate profit growth if demand is there to meet it. Even a small cooling of demand will have significant implications for the bottom line.
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