A look at Tesla's earnings report

Tesla (TSLA) reported a big earnings miss this week, so naturally its stock is... surging?

I've long believed that Tesla is one of the most important companies in the world and its CEO Elon Musk is one of the most fascinating characters of all time. As such, I've been following him and the company closely for more than a decade.

And after the market close on Tuesday, Tesla reported first-quarter earnings that badly missed expectations:

• Revenue declined 9% year over year to $21.3 billion, which was $1 billion below analyst expectations.
• Gross margin dropped from 19.3% to 17.3% from a year ago.
• Operating margin dropped from 11.4% to 5.5% year over year.
• Earnings per share ("EPS") fell by more than 45% year over year from $0.85 to $0.45, missing expectations of $0.52.
• Operating cash flow declined 90% from $2.5 billion to $242 million, while capital expenditures ("capex") rose from $2.1 billion to $2.8 billion. As a result, free cash flow ("FCF") collapsed from $441 million to negative $2.5 billion.

And Tesla's outlook for the rest of the year isn't much better. As the company said in the earnings report:

In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023, as our teams work on the launch of the next generation vehicle and other products.

In light of all this bad news, you would probably have expected the stock to fall off a cliff. But instead, TSLA shares jumped by a whopping 12.1% yesterday.

To understand why, I'll turn once again to my analyst Kevin DeCamp, who has also closely followed Tesla over the years...

Longtime readers know that Kevin has been bullish on the stock for more than a decade. And in my April 24, 2023 e-mail, I shared his bull case for Tesla – since then, through yesterday's close, the stock is flat and the S&P 500 Index is up more than 22%.

In a private e-mail, Kevin started by laying out short sellers' thesis:

It has been a rough few quarters for the company (and the stock), with growth and margins coming down substantially, so naturally shorts once again smelled blood in the water, predicting that Tesla was finally going to "re-rate" much lower.

One of the reasons the car business is so tough is because the high fixed costs make it extremely difficult to deal with slowdowns and recessions without going massively cash flow negative (or bankrupt). Surely, this was about to finally catch up to Tesla as its massive investments in factories across the world resulted in overcapacity of a few stale EV models that the world has had enough of (not to mention Musk's distraction with X and politics).

The big layoffs Tesla recently announced (at least 10% of its 140,000 employees) was clearly the canary in the coal mine and the stock's recent selloff was likely the beginning of a much bigger rout on the way to Tesla finally being valued as the auto company that it is.

On top of this, Musk recently announced that on August 8, Tesla will reveal its "robotaxi." For anyone that has followed the company for years (particularly his insane robotaxi promises in 2019), this surely must be an act of desperation to distract from Tesla's failing car business.

Kevin then explained why Tesla rose sharply despite reporting disappointing earnings:

This was one of Tesla's best conference calls in quite a while, as Musk did not fail to disappoint the shorts once again in two major ways:

1. To address the fixed cost problem, Musk announced that Tesla was accelerating its third generation platform launch – not scrapping it as Reuters reported incorrectly a few weeks ago. Tesla will accomplish this by leveraging its current factories and production lines to launch multiple vehicles by "early 2025 if not late this year." The original plan was to launch these in a new factory in Mexico and it appears that the delay of this new factory was misread by Reuters. This is a brilliant solution to its potential overcapacity in this uncertain environment. That said, it will undoubtedly be extremely difficult for Tesla to deliver on this accelerated timeline.
2. Tesla reaffirmed to the market that it is much more than an auto company. It reported record deployments and revenue in its energy segment and increased its artificial intelligence "training compute" by a whopping 130% "to achieve vehicle autonomy and a ride-hailing service."

Tesla's head of AI described the data flywheel that has enabled rapid updates of its full self-driving ("FSD") software, and the team expressed confidence that its vision-only (no-lidar) approach to autonomy is the only scalable solution. To accelerate adoption, Tesla is giving a one-month free trial of FSD to its customers in the U.S. and Canada, and dropping its cost from $199 to $99 per month.

The biggest shortages in the AI boom are energy and computing power – Musk described in detail the potential that Tesla's fleet has in helping meet this demand with its onboard inference computers and batteries when the cars are idle. What other auto companies are thinking this boldly?

As Kevin concluded:

Tesla may end up being the most frustrating short of all time. Just as things appear to be lining up perfectly for the short to finally work, Musk pulls another rabbit out of his hat.

Tesla's rough period is far from over, but you have to give it to Musk and his team for getting a win Tuesday night and yesterday.

You won't be surprised to hear that Tesla bears had a different take on Musk's promises. As Mark Spiegel of Stanphyl Capital posted on the social platform X:

And my friend Doug Kass of Seabreeze Partners wrote in a missive yesterday that he added to his short position because:

Tesla is smoke and mirrors...

Wall Street numbers will go down measurably – yesterday's report will take billions of dollars of sales out of the sell-side estimates and take down the 2025 consensus EPS forecasts to around $3.00/share (from almost $8.00/share months ago).

And then there is the cash burn – at negative free cash flow of $2.5 billion in the quarter, the company has about 2.5 years of cash left...

We are likely in the process in which investors begin to value Tesla more like an automobile manufacturer and less like an AI play.

This takes time, as the devotees slowly lose faith in their reasons for owning Tesla's shares.

But faith they are losing, as measured by the already sizeable absolute decline in the company's market capitalization.

And my friend Anton Wahlman is skeptical that Tesla can deliver on its accelerated new-model launch schedule. Here's his blog post from yesterday on this: Tesla can't develop an all-new car in a year. Excerpt:

• Tesla excited Wall Street by promising a new car going into production by the second half of 2025 – or even earlier...
• [It] takes at least four years to develop an all-new car, counting from the very beginning to the moment it's in the showroom.
• Four or more years is what it took for the CyberTruck for its development lifecycle to be completed – 2019 (or earlier) to the Fall of 2023.
• Tesla clearly made this decision at some point after the last quarterly report, approximately 90 days ago, possibly even this week. The clock just started ticking.
• It would be possible to deliver a less ambitious variant of an existing car (Model 3 or Y) in volume production by 2025, but not something all-new.

Regarding Wahlman's final point, this "Heard on the Street" column in today's Wall Street Journal underscores the trade-offs Tesla is making: Elon Musk Needs Cheaper Teslas to Pay for Everything Else He Wants. Excerpt:

Tesla on Tuesday announced something totally unexpected from a company run by Elon Musk: a compromise.

The surprise passage of its highly anticipated first-quarter results came in the outlook statement.

"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."

However, as the column continues, "there was a twist":

The company went on to explain that these new models will combine elements of both its current production platform and its "next generation" one under development. That means cost savings will be lower than previously expected, but so will capital spending as existing production capacity can be adapted to the new products. Tesla won't be opening new factories dedicated to a cut-price vehicle anytime soon.

In other words, Tesla is trading radicalism for speed of delivery and capital efficiency, at least in the medium term. It is a sensible decision from a company that has historically preferred to take the heroic road. Institutional investors will likely love it; the Tesla fan base perhaps less so.

The column expresses skepticism about the other main promise Musk has been making – that Tesla robotaxis are just around the corner:

Musk is right that Tesla's valuation doesn't add up without driverless cars, regardless of its growth in deliveries. So it was disappointing that the company gave investors no new ways to track its progress or gain confidence in its technology beyond well-worn assertions that it has the right approach...

The company is holding an event to unveil a "robotaxi" on Aug. 8, but its self-driving technology requires constant supervision, suggesting delivery of truly driverless Teslas is still years away. Concrete details of its approach and performance benchmarks could help build investor confidence in what is usually seen as a moonshot, though.

In summary, my view on Tesla hasn't changed: Like 99% of stocks, it's neither a good short nor a good long.

Regarding the former, ever since I covered my misguided and painful Tesla short in 2015, I've been warning that the stock is a bad short for two main reasons:

1. The business has a lot of open-ended optionality because it's developing new products in some of the world's largest markets like autos, energy, and AI.
2. Tesla has a base of retail investors who might jam the stock upward at any moment (for more on this, see this recent WSJ article: Meet the Tesla Diehards Sticking With the Stock Despite Its Disastrous Year).

But I wouldn't want to own the stock, either...

Even though it's down 60% from its all-time high in late 2021, it still has a massive $525 billion market cap and trades at nosebleed multiples of revenue and profits as if it were an asset-light company rather than an asset-heavy one.

The key for the stock going forward is growth. These two charts in this WSJ article from earlier this week, Tesla Accelerates Rollout of More-Affordable EVs as Profit Drops Sharply, show that the stock has closely followed revenue growth:

I think this correlation will continue: If Tesla's revenue growth rebounds, so will the stock... but if it stagnates or continues to fall, the stock will as well.

And I still believe that the world will continue to pivot toward electric vehicles ("EVs"). But the ferocious competitive environment (underscored in this WSJ article: China's EV Price War Is Just Getting Started) is likely only going to worsen...

As such, I'm wary about all automakers' stocks – not just Tesla's.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.