Tesla 2024 Outlook: Stock Could Implode if Profits Fall by Double Digits Again
Tesla doubled in 2023 while profits dropped by 20%. This is largely due to it being included in the Magnificent 7 tech index, which also doubled on the AI theme
Tesla was only a good short this year right before its bad quarterly results and should’ve been bought on every dip post earnings results. One could’ve made over 150% returns versus Tesla’s gain of 112% year to date.
Bad news about Full Self-Driving and Autopilot recalls was short-squeezed in 2023. Buying Tesla’s dip was in vogue this year due to reliable call option buying and little institutional selling.
Tesla’s stock has more than doubled this year despite profits dropping by 20% through Q3. This is because it was considered an “AI stock” and was included in the “Magnificent 7” despite having little AI credibility.
In 2024, Tesla faces 5 major earnings tailwinds (of which only 2 are solid) and 6 major negative factors for profit growth (all of which are solid).
How One Should’ve Traded Tesla This Year
Who would’ve thought that a carmaker could see its profits drop by 20%, yet have its stock price bid up by more than double? This is exactly what happened with Tesla this year and most observers—yours truly included—are at a loss for words as to how this could happen.
To put this into perspective, look at the pretax profit growth and returns in Figure 1 below and note that Tesla’s three major rivals in the table only saw their share prices rise by an average of 8% year to date.
Figure 1: Tesla’s Stock is Up 112% on Deteriorating Results
Source: Company data
And along the 112% ascent of its share price year to date, Tesla managed to withstand bad news that would send any other carmaker’s shares plunging. It’s worth taking a look at the significant bad news which caused Tesla’s stock to briefly sell off versus the negative catalysts that were brushed off and bought up.
Below are the major negative catalysts which managed to clobber Tesla’s share price, albeit briefly:
April 3rd Q1 Delivery Miss: On the Friday before the Q1 delivery report was announced on Sunday, April 2, the punters had high hopes for a beat and sent Tesla up by 6.2% to $207 on strong volumes. But Q1 deliveries were only in-line with consensus at 422,875 (+36% YoY; +4% QoQ) so Tesla dropped by 6.1% the next day. Tesla’s stock is up 41% to $261 since then versus the Nasdaq 100’s rise of 29% during the same period.
April 19th Q1 Earnings Miss: Tesla drops by 9.7% after seeing worse than expected Auto and Energy gross margins, along with a 44% miss of consensus free cash flow (FCF) estimates. By month end, Tesla drifts down to $154, marking a near-term bottom and then surges by 90% to $294 by mid-July (the Nasdaq 100 rises by 26% during this time). Tesla’s stock is up 60% to $261 since Q1 results versus the Nasdaq 100’s rise of 30% during the same period. Details on initial results here, and more granular analysis after the Q1 10-Q was filed here.
July 19th Q2 Earnings Miss Again: Non-GAAP EPS missed by 1.2%, but one-off items related to forex and minorities boosted earnings by 13%. Stock drops by 9.7% to $263 the following day (post-result impressions here; 10-Q analysis here). Tesla’s stock is only slightly down by 0.8% to $261 since Q2 results versus the Nasdaq 100’s rise of 9% during the same period.
October 18th Q3 Earnings are Even Worse: Despite an abnormally large booking of regulatory credits (which have 100% profit margins) and an unusually low tax rate of 8.2%, non-GAAP EPS of $0.66 missed consensus estimates of $0.72 by 8%. The stock dropped by 9.3% to $220 the following day (post-result impressions here; 10-Q analysis here). Tesla’s stock is up 19% to $261 since Q3 results versus the Nasdaq 100’s rise of 14% during the same period.
What is clear from the above catalysts which caused Tesla to drop nearly 10% the following day was that (a) it was safe to bet against Tesla just before earnings results (not necessarily delivery reports) and (b) one could’ve made handsome returns buy buying the dip after bad earnings were announced.
Below are all the significant negative catalysts that should’ve caused Tesla’s share price to drop. Instead, they were brushed off by the market and even served as a buying opportunity:
January 13th 20% Global Price Cuts: Tesla cuts prices by 20% globally. Stock rises by 8% the next day versus a flat move in the Nasdaq 100.
January 25th Dodgy Earnings Results: Q4 non-GAAP EPS beats by 7% despite Auto gross profits (ex-credits) missing by 8%. Stock rallies by 11% versus a 2% move in the Nasdaq 100. Main reason is that Musk said on the earnings call that the 20% price cuts had led to orders being “twice the rate of output”. Six days later, the 2022 annual report is released and reveals that Tesla reversed valuation allowances of $1.5 billion in deferred tax assets in Q4 2022 (tax rate was only 6.9%). Stripping this out would’ve led to net profit being 41% lower than reported (report here).
February 16th FSD Recall: Tesla recalls their Full Self-Driving (FSD) system after regulators warn that it leads to unsafe driving (detailed report here). This what the bears had been waiting for not only because FSD is a dangerous ADAS product, but also because Tesla had booked around $5 billion of revenues from it since Q4 2016. The stock closes down by 5.6%, but bounces back by 3.1% the next day versus the Nasdaq 100’s decline of 0.6%. The fact that the regulator allowed Tesla to fix problems with FSD via an over-the-air (OTA) software update sinks in and the dip-buyers come back in droves.
May 25th Tesla Whistleblower Exposé: Germany’s Handelsblatt publishes details from a 100-gigabyte file it received from a former Tesla employee who became a whistleblower. Stock rises 11% over the next three trading days into month end (detailed view here).
October 2nd Q3 Deliveries Miss by 4.4%: While Tesla had warned that Q3 would be slow due to factory upgrades, deliveries only clocked in at 435,059 (+27% YoY; -7% QoQ), which was 4% below an already toned-down consensus. The numbers were announced pre-market and Tesla’s stock sank by 3% but rallied throughout the day to close up 0.7%. It was clear that Tesla had warned of a weak quarter of deliveries and that it would still make its 2023 target of 1.8 million deliveries.
December 13th Autopilot Recall: Tesla was forced to recall over 2 million cars—everything they ever sold in the US since October 2012—due to its Autopilot “cruise control” system being deemed as having flaws by the regulator. The stock initially falls as much as 4.6% but ultimately closes up by 1% on the day. Once again, dip-buyers hoover up Tesla shares knowing that the US regulator will let Tesla fix its Autopilot problems via an OTA software updates (full report here).
Lessons learned from above are two-fold: (a) don’t bet against Tesla—even if earnings were as bad as Q4 2022 results—if the stock plunged by 65% over the previous 12 months; and (b) the US traffic safety regulator is lenient on Tesla, so expecting the share price to drop on any recalls is futile.
Why Tesla Outperformed on 20% Lower Earnings
Based on consensus EPS estimates of $6.43 for 2024 at the beginning of this year, Tesla was trading at 17x on the first trading day of 2023 (in reality, it was trading at 28x versus current estimates). Consensus has slashed its 2024 EPS estimates by 39% to $3.89 since then, yet Tesla’s share price is up 112% and now trades at 67x 2024 estimates (see Figure 2).
Figure 2: Tesla’s Earnings Outlook for 2024 Has Dropped by 39%
Source: Bloomberg
Among the “Magnificent 7” (Apple, Microsoft, Amazon, Google, Nvidia, Meta and Tesla), only Apple and Tesla see a trend where the share price has risen while 12-month forward EPS estimates have been slashed. The fact that Tesla has been included among the Magnificent 7—which is up 109% year to date and accounts for most of the S&P 500’s gains this year—is astounding, given how capital-intensive car manufacturing is.
The one imaginable reason why Tesla was erroneously included in the Magnificent 7 is that Musk has crafted an aura of non-existent AI capabilities at the carmaker (Full Self-Driving, robotaxis, Tesla humanoid robot, etc.). His tweet last night replying to a claim that Tesla was overvalued as a carmaker says it all: “Tesla is an AI/robotics company” (see Figure 3).
Figure 3: Musk Pumps Tesla as an “AI/Robotics Company”
It should be noted that Tesla has never published any data on its AI or robotics-related earnings. Its Full Self-Driving technology might be considered an “AI” type of technology, but if that’s the case, then carmakers like Mercedes Benz should possibly replace Tesla in the Magnificent 7: Tesla’s Full Self-Driving product is a cruise control system rated by itself as Level 2 technology whereas Benz has received approval to test its Level 3 system in multiple cities.
Musk established “X.AI”, a start-up devoted to artificial intelligence that recently filed with the SEC to raise up to $1 billion (story here). This begs the question why he didn’t include it in Tesla, one of history’s biggest fund-raising machines.
Finally, even if Tesla were an “AI” stock, it’s more expensive than the others in the Magnificent 7 (see Figure 4):
Tesla has the highest PER among the Magnificent 7, despite having no AI capabilities to show for.
Tesla’s 2024 PEG ratio (PER ÷ [EPS growth rate x 100]) is the highest among the Magnificent 7 except for Microsoft (which owns a 49% stake in OpenAI) and Apple.
While sporting such rich valuations and despite having nothing much to show for in terms of AI technology, Tesla has the lowest free cash flow yield among the Magnificent 7 (in a high interest-rate environment).
Figure 4: Tesla Most Expensive & Least Profitable Mag-7 Stock
Source: Company data & Bloomberg consensus estimates
2024 Outlook: Profitability to Further Deteriorate
A brief explanation of “New Models 101” to show why Tesla likely won’t see a bottoming out of gross margins in 2024 and then a look at profit tailwinds and headwinds in 2025 below that.
Tesla’s pretax profits in Q3 are down 44% YoY and margins have nearly halved to 8.8% from 16.9% last Q3. This is all because of waning demand for Tesla cars due to their old age among new offerings from rival carmakers. Hence Musk’s decision to slash prices on Tesla’s entire lineup.
There is a huge misconception among many of the Tesla bulls on Wall Street regarding Tesla’s gross margins “bottoming out in 2024”. There has been no example of a carmaker with an old model lineup stopping the decline in profitability without drastic measures such as a full makeover of the old cars in the portfolio, or replacing them with brand new models that sell well.
Over 95% of Tesla’s global sales are made up by the Model 3 and the Model Y which are six and four years old, respectively, versus a normal lifetime of six years for one generation of a model. The Model 3 recently had a “facelift” in China and the EU, but this has not really increased sales, which are down in China but up in the more profitable EU market. Old models need radical changes both to the inside and outside of the car, which is why the Toyota Corolla has been a best seller since 1974 and the BMW 3 Series has lasted since its introduction in 1975.
When models age, demand wanes as is clear with the Model 3 and Y given that Tesla slashed prices on average by 18% on the Model 3 this year and 29% on the Model Y. This is unprecedented and is huge brand destruction for anyone who drives a Tesla.
The average resale value of a used Tesla has crashed by 31% since January 2019 and 44% since its July 2022 peak (see Figure 5). Musk has made it clear that he prefers moving the metal rather than maintaining a strong brand value, which begs the question of what his endgame is. He did build two new plants which raised Tesla’s global capacity by 48% to 2.55 million annually, so his desire to focus more on volume than brand value is understandable.
But the smartest move he could make now is to stop the price cuts and reduce capacity. This would lead to one-time valuation losses, but it would save Tesla’s once strong brand while they roll out new models and conduct costly full model changes on the Models 3 and Y.
Figure 5: Plunging Residual Values of Tesla Cars
Below are the main points regarding the potential tailwinds and headwinds that Tesla faces in 2024:
2024 Potential Profit Tailwinds
US Tax Credits More Easily Attainable: $7,500 point-of-sale credits in the US could make it more attractive to buy a Tesla given that one receives an immediate discount of this much, rather than waiting to deduct it from annual taxes. But this goes for many other locally made brands, so it’s hard to say exactly how much benefit Tesla sees from this. Their model lineup is old, which is why they cut prices every quarter this year despite the tax incentive of $7,500 since January.
R&D Should Decline: The launch of the Cybertruck at the end of November led to a 27% YoY increase in Tesla’s R&D expenses through Q3. If R&D would’ve remained flat through Q3, cumulative pretax profits would only be down 14% YoY rather than 20% YoY.
Tesla Energy should grow: While I’m not as up to speed with Tesla’s Megapack business, this is an area of growth with Q1-Q3 gross profit up 541% YoY but only a 6% weight of total gross profit. Furthermore, the Megapack business would be pegged at an average PER of around 22x, which would be dilutive to Tesla’s extremely high valuation for its auto business.
Lower commodity prices: The benefit from this is hard to measure, but in general, most carmakers are guiding for continued declines in commodity prices in 2024, but not as big of a tailwind as they saw from this in 2023. The big win for Tesla would be if their lithium prices—the highest priced commodity in an EV—were to decline.
Lower interest rates: This usually boosts demand for cars as the cost of leasing or borrowing to buy a car declines. As with easier access to the $7,500 EV subsidies in the US in 2024, it’s difficult to tell how much of this tailwind effect for the industry goes to Tesla and how much goes to other carmakers. Recent trends show that hybrid sales in the US have doubled and are set to grow further ast Toyota and Ford ramp up output in 2024.
2024 Potential Profit Headwinds
Tax rate in China rises from 15% to 25%: Based on Tesla’s agreement with the Chinese government, Tesla’s tax rate in China rises from December 22, 2023 to 25% from 15%, unless an extension is granted. The impact on Tesla’s bottom line should be large, as the Shanghai plant is Tesla’s most efficient and profitable factory in the world.
Based on disclosed pretax profit data from Tesla (which includes profits derived from all sales outside of the US) and my estimates, if Tesla saw a 25% tax rate in China versus the actual rate of 15%, its net profit would’ve been 14% lower in 2021 and 8% lower in 2022. Because the new factories in Texas and Germany should continue to generate losses next year, this should augment the profitability of Tesla’s Shanghai plant within overall earnings.
And this is a concern, as a profit decline at Tesla’s China plant is almost certain, given the economic malaise in China and a price war in its EV market. Moreover, exports to the EU—which have been the main source of profits for Tesla’s Shanghai plant—should fall in 2023 given the removal of EV subsidies in France and Germany, the EU’s top two markets.
Cybertruck Could Lose $2 Billion: Given the high cost of the Cybertruck’s stainless steel and the higher labor costs involved in the assembly process, I see no reason why Tesla doesn’t see huge gross losses from this new model in 2024. Rivian is expected to see $1.9 billion in gross losses this year on 50,166 deliveries of its pickup truck and SUV.
Consensus sees Tesla shipping 81,894 Cybertrucks in 2024, but this is unrealistic as a recent Reuters article sourcing information from 9 Tesla employees said that internal battery capacity for Tesla’s 4680 cells allows for only 24,000 of annual output (article here). Even Musk admitted on the Q3 earnings call that the Cybertruck wouldn’t be cash-flow positive until 2025.
Tesla’s In-House Battery Cells Continue to be a Drag on Profits: Tesla has said its in-house cell production is a drag on earnings at the R&D level since Q1 2022 and at the production level since Q1 2023. These are the 4680 cells used in the Cybertruck which has now gone into ramp-up mode. Given the Reuters article about Tesla not having mastered the art of dry coating electrodes in order to lower costs (totally believable, given that Panasonic has yet announce its success at this), in-house 4680 cell output may continue to be drag on Tesla’s earnings in 2024.
Lower Regulatory Credits at Least a $288 Million Headwind: Tesla recognized $288 million of regulatory credits in Q1 due to changes in regulation which entitled them to additional consideration for credits sold previously. Because of this, sales of regulatory credits—which have 100% profit margins—are up 3.7% YoY in the 9 months through Q3. Excluding the boost from Q1, credit sales would be down 18.3% YoY. Given the rollout of more new EV models at rivals who buy credits from Tesla, the decline in 2024 could be rather large for the first time.
The EU’s Top-2 Markets See Lower EV Subsidies in 2024: France is removing EV subsidies from any cars imported from China, which will immediately make the China-made Model 3 €7,000 ($7,700) more expensive. Same goes for the China-made Model Y, although Tesla can ship the Y from its German plant, albeit at not as high of a profit margin. In Germany, prices should rise across the board on the Models 3 and Y as Germany recently canceled up to €4,500 ($4,950) of EV subsidies. France and Germany made up 35% of Tesla’s EU deliveries through November this year.
Regulatory Risks May Come to a Head in 2024: Tesla is currently under investigation by the DOJ, the US Attorney’s Office for the Southern District of New York (SDNY), the SEC, the NHTSA, and the California DMV in the US. In Norway and Sweden, Tesla is being probed for faulty suspension problems by regulators who could spark an EU-wide problem for Tesla if they decide to issue a recall, as the EU would likely follow. It doesn’t help Tesla that Musk is hellbent on fighting Scandinavia’s demands for unionization of Tesla’s local operations.
The California DMV (Department of Motor Vehicles) has ruled that Tesla is misleading customers by calling its driver-assist products “Autopilot” and “Full Self-Driving”, but they have yet to make an order on how to resolve this. They have the power to stop all sales of Teslas in California (15% of global deliveries) although it’s highly doubtful that they would make such a ruling. Nevertheless, a ruling is expected soon.
The SDNY investigation into possible embezzlement by Musk at Tesla could also be close to being announced. The Wall Street Journal published an article in September implying that a grand jury may have been impaneled (link to article here).
Figure 6: Grand Jury May Exist in Musk Embezzlement Probe
It was disclosed that in Tesla’s 2022 10-K (released on January 31st) that Tesla received “subpoenas” for information regarding “matters associated with personal benefits”. This is exactly what the SDNY probe was said to be looking at in the Wall Street Journal article 8 months later.
[Tesla] has received request for information, including subpoenas, from the DOJ. These have included requests for documents related to Tesla’s Autopilot and FSD features. Additionally, [Tesla] has received request for information, including subpoenas, from the DOJ, regarding certain matters associated with personal benefits, related parties, vehicle range and personnel decisions.
Tesla’s 2022 10-K annual report, page 24 (link here)
Pro tip: betting on legal liabilities is a fool’s errand but can sometimes be a short-seller’s icing on the cake.
Final Thoughts: Tesla is a Carmaker
The shortage of automotive semiconductors had stalled output at all carmakers except for Tesla since the pandemic began in 2020. Tesla was nimble at repurposing non-automotive chips and making some in house in order to fully reap the benefits of rivals not having enough supply: it raised prices by 21% on average and sold every car it made.
The chip shortage began to ease in late 2022 and is likely back to 90% of pre-pandemic levels now. Tesla cut prices on its lineup in the US and China in December 2022 and announced a global price cut of 20% in January 2023.
The only thing that’s changed since December 2022 is that rival carmakers have much more supply and many more new models on offer. This is why Tesla has slashed prices by around 5% further in each of quarter of this year. And there’s nothing to stop this trend if Musk is hellbent on moving the metal rather than reducing capacity.
Consensus estimates of 2024 EPS rising by 27% to $3.89 has little credibility. Analysts have been wrong for the last 5 quarters and it’s no surprise given that over half are tech or energy analysts who don’t understand auto industry fundamentals. When it’s all said and done, Tesla is simply a carmaker.
None of the above is investment advice. Thanks for reading my reports this year and have a happy New Year. Hope to see you again on January 2nd, after Tesla announces Q4 2023 delivery results.
Oh my gosh, I just finished writing something loosely related to something mentioned in this excellent piece before having read it. What I wrote even has the exact same piece of art. Not sure if I'm publishing it Monday or Tuesday, but could only think... great minds! (H/T @bondangle, whose "like" of this led me to it!)
Union pressure in US/EU is significant 2024 headwind imo.