Tesla Q1 Delivery Results Underwhelm
Despite huge discounts and new EV subsidies of $7,500 in the US, growth is lower than guidance
Tesla announced Q1 2023 deliveries on April 2nd and the results were underwhelming, especially in light of the high-volume 6.2% spike in Tesla’s stock last Friday, which seemed like big expectations of a Q1 delivery beat ahead of the numbers.
Figure-1 shows the various delivery estimates that tend to serve as benchmarks for Tesla’s quarterly deliveries. At best, one could say that the Q1 deliveries were “in line”, but looking into the numbers raises concerns about burgeoning inventory and the fact that huge price cuts by Tesla and new EV subsidies in the US failed to fuel higher growth.
The most important benchmark to Tesla is its own survey of analysts who cover them as this is a snapshot of where consensus was as of last week, before Tesla Investor Relations (IR) sent their results out. Here, Tesla’s Q1 result was 0.3% higher, but is the weakest beat versus its survey in a long time.
Figure-1: Tesla’s Q1 Deliveries of 422,875 vs Consensus
You can tell that Martin Viecha, head of Tesla’s IR, was concerned about how the results were being interpreted, saying that Bloomberg and Factset were okay to use as long as they include “23-30” sources, like Tesla does.
Key Points to Tesla’s Q1 Delivery and Production Result
Incremental Growth is Weak Despite Big Price Cuts & US Subsidies: While Q1 deliveries were up 36% YoY, they rose by only 3.3% from Q4 2022 on a retail basis (excluding leases, which is what is reflected in the P&L). This is quite weak given the huge price cuts made in January, which should translate to at least a 6.2% QoQ decline in average selling prices (ASPs) in Q1, as Tesla’s CFO committed to ASPs not going below $47,000 on the last earnings call (Q4 2022 ASPs were $51,305). Note that the new EV subsidies of $7,500 in US should’ve also been a powerful tailwind, but didn’t help as much as expected.
Sharp Inventory Increase Points to Weak Q1 Free Cash Flow: Tesla’s Q1 production of 440,808 was 17,933 units (4.2%) higher than deliveries and implied inventory rose to 56,691 vehicles for the quarter. Given that 55% of inventory was higher-priced Models S/X, the Work in Progress component of Q1 Inventory could rise by 27% QoQ to $4.4 billion, from $3.5bn in Q4 2022. Tesla has consistently produced more S/Xs than it delivered since Q1 2022, but Q1 2023’s level was a record high at nearly 2x, with 19,437 produced but only 10,695 sold. The Model S is 10 years old, while the Model X is 7 years old. Both got slight facelifts in 2021 but are in dire need of a full makeover if demand is to be rejuvenated.
Model S/X Deliveries Fall 27% YoY and 38% QoQ: There were two price cuts for the Models S/X during in Q1, as well as Supercharging incentives offered as the quarter came to an end. In their press release, Tesla noted that they “continue to transition towards a more even regional mix of vehicle builds, including Model S/X vehicles in transit to EMEA and APAC”. This comment is incomprehensible in light of the fact that exports of the Models S/X were over 10,000 vehicles per quarter back in 2017 and 2018.
Entry-Level Model 3 to See Headwinds from Q2: While Tesla’s cheapest EV, the Model 3 SR+, was eligible for the $7,500 new EV subsidies in the US in Q1, changes in the law last Friday exclude any EVs with battery materials from non-trade partner nations and Tesla’s Model 3 SR+ uses LFP battery cells from China. Currently in its sixth year of production, the Model 3 is also aging and saw a 36% drop in 2023 EU sales and an 18% decline in China. This model made up 33% if Tesla’s Q4 2022 global deliveries and could drag down overall sales growth this year.
Price Cuts Needed to Hit 2023 Target of 1.8 Million Vehicles: Tesla will need to cut prices further if it wants to hit its 1.8 million delivery target for 2023. While demand for the Model Y in the US is still firm, lead times in the EU and China a short, implying a more tepid demand environment. Getting to 1.8 million deliveries for the full year at this rate may be challenging as 38% of Tesla’s global deliveries are comprised of three aging cars: the Models S, X and 3.
CFO’s Gross Margin Promise of “Over 20%” in Question Now: While Tesla’s CFO said on the last earnings call that Tesla would not see ASPs lower than $47,000 and Auto gross margins (ex-credit and leases) would remain above 20% (they were 22.5% in Q4 2022), this commitment may no longer be valid if Tesla cuts prices again. To really move the metal at its two new factories in Texas and German, along with expanded capacity in China, Tesla would have to cut prices not only on its aging models, but its relatively newer Model Y as well.
While the consensus for 2023 adjusted EPS is currently at $3.98—putting Tesla on a 52x PER—it’s hard to see this being achieved under the weaker than expected demand situation for Tesla in Q1. It is even harder to see how Tesla can grow its EPS by 41% YoY to $5.61 in 2024—as consensus expects—after looking at Q1 delivery results. The growth story for Tesla and the valuation it is being awarded may be tamped down in the coming months.
So glad that I'm able to read your comments on Substack, since I left the Twitter bubble. Tesla's aging portfolio demands a new story and I wonder what they'll come up with.
Price cuts alone... won't cut it!