How Does Tesla Stack Up to Rivals in 1H 2023? Quite Horribly

The only thing holding Tesla up are delusions that it will grow EPS by 44% next year

Tesla & VW Group Slash Prices and See Profit Declines; Toyota Now Most Profitable Carmaker

Tesla continues to struggle with its aging model line-up, leading to further price cuts and deterioration in profitability during Q2. At the same time, a noticeable recovery in automotive chip supply has allowed legacy carmakers to see a huge rebound in sales volumes and profitability.

Below is a brief summary of industry dynamics during 1H 2023 and how weak Tesla’s results were when compared to its legacy rivals. The last section discusses how unlikely it will be for Tesla to attain the 2024 consensus EPS estimates of 44% growth.

After having seen vehicle sales slide for most of the last three years, the major global carmakers saw their deliveries rise by 5.8% YoY in Q1 and then spike higher by 11.1% YoY in Q2. While this pales in comparison to Tesla’s 55.2% YoY growth in 1H 2023 (from a low base due to the Shanghai plant being idled in April 2022 due to covid), double-digit growth like this for large carmakers is rare. 1H 2023 growth among the major carmakers was 9.4% YoY, or over 2 million vehicles more than last year.

The only two carmakers to see 1H 2023 annual profit declines and margin deterioration were Tesla and the VW Group, both of which are seeing problems with their weak model line-ups. Tesla slashed prices due to its aging models having become stale and competition having become stiffer, while the VW Group had to lower prices due to its not-so-well received EV line-up (especially in China) and weakness at Audi.

Honda saw a huge increase in pricing due to the higher weight of Acura and hybrid sales, while Ford and GM saw higher pick-up sales boost average prices. BMW prices rose due to BEV sales making up 12.5% of sales in 1H 2023 versus only 6.5% last year. Tesla saw prices plunge by 13.4% from last year’s levels and is approaching Honda’s level of pricing.

Figure-1: Average Price Changes by Carmaker in 1H 2023 (% YoY)

Note: All calculations in USD-terms; VW Group excludes China sales due to no disclosure on China-based revenues. BMW, Honda and Subaru based on automotive division results. Regulatory credits & FSD revenue recognition stripped out of Tesla’s Automotive revenues.

Tesla Drops to 4th Place in Profitability; 7th if Credits Excluded

Figure-2 shows the rankings of carmakers by pretax margins. I prefer using pretax margins over operating margins for the sake of comparison because (a) it shows how well a carmaker manages its capital and (b) the Japanese carmakers only disclose their Chinese joint-ventures’ profits in their equity-method income numbers.

After having the highest profit margins in the passenger car industry for two years in a row, Tesla dropped to fourth place in Q2, and seventh place if regulatory credits are excluded. The stock has doubled so far this year on these poor results.

It is likely no coincidence that Tesla had industry high margins during the automotive chip shortage and was forced to lower prices once chip supply recovered and competition re-emerged. Tesla was very adept at repurposing non-automotive chips before others did during the chip shortage and relied less on the older chips that legacy carmakers use and fell short of until recently.

Here are the main points about the profitability rankings (refer to Figure-2):

• Tesla’s Q2 hurdle was low: Tesla had a very low Q2 hurdle as their Shanghai plant was shut down for one month due to covid in April 2022. Nevertheless, operating profit dropped by 3% YoY, but pretax profit rose by 12% YoY due to a one-off currency gain (which they don’t explain in their 10-Q, despite larger exposure to the sagging Chinese yuan than the stronger euro in Q2).

• Deliveries up by 10% QoQ yet Q2 pretax margins shrunk: Despite the one-off $328 million forex gain that boosted Q2 pretax profits by 11%, Tesla’s pretax margin sunk slightly further from Q1’s 12.0% to 11.8%. Excluding the one-off gain currency gain, Tesla’s pretax margin would have slid to 10.5%, a 150 bps decline versus Q1. This was due to unit prices falling by 1.9% QoQ while costs/unit only declined by 1.1% QoQ. Tesla trades at 51x 2024 consensus EPS. Consensus is way too optimistic.

• Toyota becomes the most profitable carmaker in Q2: Toyota cut more costs during the chip shortage than most other carmakers. They actually paid for their tier-2 suppliers to stay afloat during last year’s commodity price spikes. So, despite only a 2.6% YoY rise in unit prices, Toyota saw windfall profits in Q2 as volumes grew by 14.2% YoY. Also note that Toyota sold the fewest BEVs as a percentage of sales (see Figure-3). BEVs are highly unprofitable for most unless economies of scale are attained. But Toyota did see 34% of Q2 sales made up by hybrids, which are quite profitable for Toyota, the world’s largest hybrid maker. Toyota trades at 9x 2024 consensus EPS. Consensus is way too low.

• Benz results were respectable: MBG had the highest percentage of their fleet made up by BEVs, at 18.4% in the 1H of 2023 (see Figure-3), yet they still managed to generate 14% pretax margins which were slightly higher than last year. MBG trades at 5x 2024 consensus EPS. Consensus seems a bit conservative.

• Honda has higher pretax margins than Tesla ex-credits: When stripping out regulatory credits from Tesla’s Q2 results, pretax margins were only 9.4% while Honda printed an 11.1% margin. To be fair, most of Honda’s profits come from its highly lucrative motorbike business (19% operating margin in Q2), but the car division is making a huge comeback with a 5.8% operating margin in Q2 after having been stuck in the 2% range for several years. Honda trades at 8x 2024 consensus, which seems low considering continued profit growth in Honda’s motorbike division.

• Ford sees margin declines while GM’s margins improved: Ford saw margins decline due to the retooling of its EV production lines, while GM improved its profitability compared to Q2 last year. GM’s reported pretax margin of 7.1% would’ve been 8.9% were it not for a $792 million charge GM took on the recall of the Chevy Bolt. Ford trades at 7x 2024 consensus EPS, while GM has a 5x multiple. Ford could see EPS growth rather than the expected decline in 2024 if its EV operations improve. Expectations for GM appear a bit high given how many new EVs they’re rolling out this year and next. This could negatively impact 2024 profits more than expected.

• BMW & VW both hit by higher costs and China weakness: Both BMW and VW reported earnings misses. BMW saw higher raw material costs and lower pricing in China, while VW suffered from higher logistic costs and weak sales in China. Despite a big spike in the weight of BMW’s EV sales (12.5% of 1H sales versus 6.5% last year), pretax margins were flat YoY, which is commendable. VW wasn’t as successful due largely to its EV lineup in China lacking appeal. BMW trades at a 2024 PER of 6x, while VW trades at 4x. Consensus appears a bit low on BMW (i.e. profits should slightly grow, rather than slightly decline) and a bit too optimistic on VW, which will likely see profits fall in 2024, rather than grow as consensus expects.

• Stellantis shines in Q2: Stellantis likely had one of the strongest results in Q2 (after Toyota), with a 20% beat to profits and a whopping 70% overshoot of FCF estimates. Higher prices and a strong unwinding of working capital were the main factors behind these results. It is the cheapest large auto stock in the industry, trading at only 3x 2024 EPS estimates. Weak disclosure policies (no quarterly reports; only semi-annual results) and a shrinking presence in China could be the cause.

Figure-2: Q2 2023 Pretax Margin Rankings

Note: * Stellantis numbers are for 1H 2023 as they don’t disclose quarterly financials. BMW’s 2022 numbers are adjusted for an $9.6bn revaluation gain on Chinese assets in Q1 of 2022.

Figure-3: BEV Weight of Total Deliveries 1H 2023

Despite the surge in profitability among most rivals while earnings and profitability declined at Tesla for three consecutive quarters, its stock has doubled year to date. Figure-4 shows that Tesla was the only carmaker to report double-digit profit declines in 1H 2023, yet saw its stock price double. VW’s stock price has a more sober correlation with its earnings decline. As usual, Tesla is an enigma as any other carmaker would see its stock drop on results that are this weak.

Figure-4: Profit Growth in Q2 vs Share Price Performance YTD

Note: Hyundai’s growth is in operating profit, as Q2 pretax profit is still not announced. BMW’s profit growth strips out a $9.6bn one-off valuation gain booked in Q1 2022.

Consensus View that Tesla Grows EPS by 44% in 2024 is Highly Unrealistic

Figure-5 lists up 1H margins and Free-Cash Flow (FCF) as a percentage of equity through Q2, by maker. It also lists up valuations based on 2024 consensus estimates. Here are the key points:

• Note the column with FCF generated in 1H 2023 as a percentage of equity. Tesla is the second lowest after Subaru, which had large working capital needs in Q1 due to logistics. Excluding regulatory credits, Tesla has the lowest yield on the list.

• Tesla has seen its pretax margin shrink for three consecutive quarters, from a level of 16.9% in Q3 2022, to an adjusted 10.5% in Q2 2023. This is due to price cuts needed to keep its two new factories running amid waning interest for Tesla cars. Tesla has no new global model coming out next year, so it’s hard to imagine EPS growth.

• Tesla has cut prices again at the start of Q3 in the Asia Pacific markets and Australia (where sales were almost as big as Germany in Q2). Backlogs are close to zero globally and there is rampant discounting on its new model inventories. This will likely get worse in 2024, given no new models launches in the pipeline. The Model 3 refresh might help, but it is the Model Y which has carried sales, at 67% of global deliveries in 1H 2023.

• The Cybertruck won’t go into mass production until Panasonic can ramp up its 4680 battery cells needed for the Cybertruck and Panasonic has stated this won’t happen until April to September 2024. Even if this all goes as planned, the Cybertruck will have a neutral impact on earnings, at best, in 2024. New model launches usually entail losses until the proper scale is reached.

• God forbid the Model Y sees declining volumes in 2024, as this would be a disaster for Tesla. The Model Y made up 67% of Tesla’s 1H deliveries and its sales have doubled YoY. If the Model Y needs further discounts next year to clear this year’s high hurdle, Tesla could be one of the least profitable carmakers on the list below.

• On a 2024 PEG ratio (PER divided by the percentage points of the EPS growth rate), Tesla is the 3rd cheapest auto stock in Figure-5, after Volkswagen and Subaru, based on consensus estimates. What if the Tesla’s expected EPS growth rate comes down to only 20%? This is still lofty, given the lack of new products, but the PER would rise to 60x versus the current valuation or 50x and the PEG ratio would spike to 3x from a current 1.3x.

• Consensus estimates for Tesla’s 2024 EPS has plunged by 34% from $7.26 10 months ago to $4.81 currently. Expect the drop to continue after weak Q3 results. I currently see 2023 EPS at $3.07 and expect 2024 to be down by 20% to $2.45. This yields a 2024 PER of 99x and a PEG ratio of -4.9x

• Half of the carmakers on the list below have negative PEG ratios due to expected EPS declines next year (mainly the Europeans) despite seeing the full ramp up of new products launched this year. Why should Tesla—which has no new products for 2024—be any different?

Figure-5: Valuations Based on 2024 Consensus Estimates