A look at Meta Platforms' and Tesla's earnings; My analyst's bull case for Tesla
1) Meta Platforms (META) reported third-quarter earnings after the close yesterday (see the earnings release here and slide presentation here).
Revenues grew 26% year over year ("YOY") to $64.6 billion, slightly above estimates. That's thanks to a 3% increase in user activity, a 10% increase in ad impressions, and a 14% rise in price per ad.
These are remarkable numbers – and evidence that Meta's investment in AI is paying off with better ad targeting.
Despite a 15% reduction in head count, costs rose by 36% (excluding a one-time charge for a legal settlement). So operating margin declined from 40% to 35% – which is still fabulous.
Adjusted earnings per share ("EPS") were $7.40, above estimates of $7.25.
Operating cash flow was $32.8 billion, up from $30 billion YOY. And $34.9 billion went toward capital expenditures ("capex"), so there were no share repurchases for the quarter.
Revenue guidance for next quarter is $73 billion to $76 billion, with a midpoint of $74.5 billion. That's above estimates of $73.7 billion and implies 24% growth.
Meta raised the lower end of its capex guidance range to $135 billion, so it expects the total for this year to be $135 billion to $145 billion. Given that the first three quarters' capex was $85.8 billion, this implies a huge $50 billion to $60 billion of capex in the fourth quarter.
To pay for this, the company announced that in January, it will issue a new nonvoting Class C share for every A and B share, which is effectively a 2-for-1 split.
The market's reaction to this earnings report is mixed...
The stock initially popped after hours on the strong numbers and guidance – it's remarkable that a company this large is growing this fast.
But it was trading down as much as 7% this morning due to investor concerns about the massive capex spending and dilution from the new share issuance.
For insight, I once again turned to my friend who knows Meta better than anyone. He's a highly successful private investor who invested in Meta when it was private and still owns shares he bought at less than $1.
As he texted me, "Meta's AI strategy is finally bearing fruit and it's a business model only Meta can execute on. Maybe this time the market will believe [CEO Mark] Zuckerberg."
And he broke down four points of note:
1) Meta has developed Muse, one of the leading AI models – arguably at parity with Anthropic and OpenAI.
2) The company has unmatched distribution. It has direct relationships with 500 million businesses, which the "other AI foundation model startups" (as Meta's chief operating officer referred to them) don't have.
3) Meta can credibly build an agent-to-agent network starting with their 3.6 billion daily average users and 500 million businesses. For example, a consumer using Muse can talk directly to a business' Muse via a Personal Agent Protocol. Meta has a huge moat here, with the potential to unlock massive revenues.
4) While Meta has had privacy issues in the past, going forward with AI, it should be a leader. Muse is moving to a confidential "virtual machine" where even Meta can't see the content, which should drive adoption.
He concluded, in summary:
If Zuckerberg can execute like he always has, Meta should have advantages that will compound over time, supporting strong growth into 2027 and beyond across subscriptions, application programming interface, messaging, and commerce.
Thank you, my friend!
I remain bullish on Meta, in part because I think Muse is going to be a home run. Here's an example of how valuable it is, which my friend shared with me:
I just bought a 2013 Volkswagen Passat for $6,000. When I went to insure it, my agent came back with a quote from Progressive for $4,700 for the first six months, even though I have a clean record. (Apparently the rate was so high because I didn't have existing coverage and would go down after the first payment, but it was unclear by how much.)
My agent suggested that I try shopping around, so I wasted hours doing so. The best I could find was $2,600 for the first six months from AAA.
Then, in desperation, I tried Muse. It got me quotes for $1,500 from Progressive and $260 for GEICO! It didn't actually buy the insurance for me, but it gave me the phone number to call GEICO and a reference number, so it was quick and easy to call and buy it.
I think the concerns about excessive capex spending are overblown. This reminds me of when investors lost their minds about Meta's big investment in the metaverse, which briefly caused the stock to drop below $100 in late 2022 – just before it took off.
Zuckerberg is rational – if Meta's capex isn't paying off, he'll scale it back (though it looks to me like it's paying off).
At this morning's price of around $650, the stock now trades at around 19 times next year's estimates of $33.76. That's roughly a market multiple for a far-above-average company.
Meta, along with Amazon (AMZN) and Alphabet (GOOGL), remain my favorite big-cap tech stocks.
2) Tesla also reported third-quarter earnings yesterday (see the slide presentation here).
The company beat lowered expectations for revenue ($28.1 billion versus $27.9 billion expected), EPS ($0.48 versus $0.43), and deliveries (486,532 vehicles versus around 460,000).
But for a growth stock, the YOY comparisons were grim: Revenue was flat, and operating margin tumbled from 5.8% to 2.6%. That resulted in operating income, EPS, and free cash flow ("FCF") crashing 56%, 44%, and 62%, respectively.
Let's take a look at the quarterly historical numbers for several key metrics...
In the past five years, revenue has risen only slightly, while operating income has plunged:
This is because, after peaking at 19.2% in the first quarter of 2022, Tesla's operating margin has tumbled:
Lastly, FCF has stagnated over the past five years:
Despite this dismal performance, the stock hasn't cratered – it has been flat over the past five years:
This is even more shocking given that it was trading at 115 times forward price to earnings (P/E) five years ago – and now trades at an even more ridiculous 185 times:
So what could possibly explain this apparently extreme overvaluation?
To answer that, I turn once again to my longtime analyst, Kevin DeCamp. He bought the stock more than a decade ago and still holds it to this day.
I last shared his bull case for Tesla in my July 27 e-mail, so I asked him to send me his updated thoughts. After reviewing the latest earnings report, he wrote to me:
The most important number to focus on in Tesla's earnings report is the continued exponential increase in unsupervised miles for its robotaxi fleet.
Last quarter, the head of Tesla's AI effort, Ashok Elluswamy highlighted 380,000 cumulative unsupervised, fully autonomous miles, compounding at double-digit rates weekly, with an "impeccable" safety record. He was confident that this growth rate would continue through the rest of the year.
Not only has his prediction held up so far, but the roughly 15% week-over-week increase in miles has recently accelerated with the introduction of the futuristic gold Cybercab – with no steering wheel or pedals – in Austin, Texas last month. On the call, CEO Elon Musk noted it is hard to overstate the speed of the ramp – he said the weekly chart looks "like a rocket."
Cumulative unsupervised miles were up eightfold quarter-over-quarter, and Tesla released its first robotaxi safety report yesterday that will be continuously updated. This number has leaped to more than 3 million unsupervised miles with zero people injured, zero airbags deployed, and zero pedestrians or cyclists hit.
Since its September 3 debut, Cybercabs have flooded the streets of Austin and now we have better visibility of the safety stats that gave Tesla the confidence to scale. Although Tesla still has a long way to catch up to Waymo nationwide, it has essentially caught up to its Austin fleet in a matter of weeks.
Kevin shared his personal experience in a Cybercab:
I was lucky enough to experience Tesla's Model Y robotaxis and Cybercabs last month, and they both surpassed my already high expectations. Although the robotaxi was a comfortable, safe, and flawless experience, the Cybercab's all-in focus on autonomy was next level and incredibly user friendly.
As I walked up to the Cybercab, the door opened automatically. I sat down, put on my seatbelt, and the door closed itself. My music, seat position, and preferred temperature were already synced. I hit "Start Ride" on the enormous 21-inch touch screen and told Grok to play a YouTube video. Everything just worked seamlessly.
The driving dynamics were silky smooth and felt incredibly safe. Although it's a small vehicle for only two passengers, it's very spacious inside with ample cargo space in the trunk for luggage. The clean dashboard with the enormous touchscreen redefine the experience of transportation on a level that can only be fully understood when you try it. The built-in Starlink terminal provides perfect streaming in the quiet cabin as the outside world fades away – and if you do notice some traffic, it's no longer a bother.
He also shared this photo of the inside of the Cybercab:
As Kevin continued, he believes the Cybercab and full self-driving ("FSD") will have their breakout moment:
Tesla has revolutionized transportation with its electric cars, but it has been a "slow-motion iPhone moment" due to the much bigger size of the auto industry and the relative price of a car.
However, the Cybercab is a game changer. The barrier to entry to experience electric autonomy will be minuscule compared to buying a car – many people's biggest financial decision. All those gold driverless taxis are moving billboards and viral moments on wheels. All you have to do is download an app to experience the future. A bit easier than a five-figure leap of faith for a car that you need to plug in – which sounds inconvenient to people who never experienced having the "gas station" at home.
I believe the "slow-motion iPhone moment" is about to go into hyperdrive as Tesla continues the rapid ramp of the Cybercab in city after city (expansion to Dallas is expected next month). Not only will this change the way we move around, but it will likely also help catalyze Tesla sales for people who aren't ready to give up the wheel completely and would prefer their own personal robotaxi with FSD Supervised.
FSD Supervised has already hit its inflection point this year with the take rate rising from 55% of Tesla sales in the second quarter to 75% in the third quarter. I believe the robotaxi rollout across the country will be another tailwind to those numbers. In addition, management revealed in the earnings call that they foresee rolling out fully autonomous FSD Unsupervised to customers' personal cars in certain areas of the U.S. in the second quarter of 2027.
Kevin also highlighted other good news:
Tesla said that mass production of its Semi Truck is underway, there's huge demand for Tesla Energy products that are helping fuel the AI build-out, the company has the biggest automotive backlog in four years, and production of Optimus humanoid robots is underway (though Musk tempered the ramp, saying it will take about a year to reach 20,000 units per week). But the exponential ramp of unsupervised robotaxis ramp is the most important trend for the company and the stock.
In terms of when this autonomous ramp will finally move the needle financially for the company, Musk said during the call "I think it starts to become noticeable probably in the second quarter, and then probably a big deal by the third or four quarter of next year."
There is still a ton of execution risk to get to that point next year, and many doubt that Tesla will be able to continue this rate of growth in the robotaxi rollout without major setbacks. But if Tesla pulls it off, I think it's likely the stock will be much higher as the market realizes the economics of the company have completely transformed.
Regarding the possible merger with SpaceX (SPCX), Kevin wrote:
However, there's a chance you won't be able to buy Tesla stock at that point because it could be a part of SpaceX by then. On the SpaceX earnings call two days ago, Musk confirmed each company has formed a special committee to explore the idea of a merger – which would be the biggest of all time by far – and he said he thinks it's a good idea.
Subsequently, he gave staggering increased guidance for SpaceX of a potential $500 billion to $1 trillion in revenue next year on the call, mostly due to its renewed focus on building massive AI data centers.
Meanwhile, last night he didn't give much guidance for Tesla at all. Given he has around 80% voting control of SpaceX and only 20% for Tesla, he's going to have to convince a lot of Tesla investors to go along with whatever buyout premium offered and keep SpaceX stock high enough to use as currency for the transaction. He's certainly been working overtime on the sales pitch.
Thank you, Kevin!
I would never bet against Musk and his team. They've created huge value by achieving things that boggle my mind. As I've said before, humanity owes them a debt of gratitude.
But with most of Tesla's fundamentals trending downward and the stock still trading at an extreme valuation, I wouldn't touch it with a 10-foot pole.
In fact, Tesla could be one of the stocks that gets replaced by the "Fabulous Five"...
These five little-known companies are set to benefit from the world's first fully AI brain-scale chip. And this breakthrough could open the opportunity of the decade for investors who get in before a pivotal announcement on November 5.
I'll be sharing all the details in a special presentation on Wednesday, October 28. Click here to reserve your spot.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.