Tesla vs its Major Rivals Based on Q1 Results & Outlook

A look at how badly Tesla is trending post-Q1 results versus its rivals

How Tesla Stacks up to its Rivals as of Q1: Not so Well

While Tesla held the title for having industry-leading profitability among mass-producers of passenger cars for 2021 and 2022, it was supplanted by Mercedes-Benz and BMW in Q1 (see Figures 3 & 4 below). Two factors led to this change: (1) Tesla’s aging line-up forced Elon Musk to slash prices on all models in January in order to keep factories running and (2) the recovery in automotive chip supply, which allowed rivals to increase production.

Given the continued price cuts at Tesla in Q2 and growing chip supply for rivals (VW saw 40% YoY growth in global deliveries in April), Tesla could likely be less profitable than Mercedes-Benz, BMW, Toyota and Honda in 2023. By being nimbler than its rivals at sourcing chips during the peak of the chip shortage in 2021 and 2022, Tesla essentially had a monopoly on new car sales, allowing it to hike prices and record an operating margin of 16.8% in 2022—the second highest in passenger-car mass manufacturing history (Subaru attained a 17.5% margin in 2016, although without any zero-emission credits).

But with no new worldwide model launches until late 2025 at the earliest, there are no signs of growth for Tesla next year. This points to further deteriorating in profitability and will likely lead to Tesla burning cash this year and next year (on an ex-lease, automotive basis, Tesla already saw Q1 negative free cash flow (FCF) in Q4 2022 and Q1 2023). Yet Tesla trades at over 10 times the multiples than its more profitable rivals, like Mercedes-Benz and BMW do.

Below is a look at Q1 results at Tesla and its top rivals in Germany, the US and Japan. It should be noted that, while the Japanese have few EV models to offer at the moment, they plan to grow their internal combustion-engine (ICE) vehicle sales by 16% YoY on average in fiscal March 2024. This too is competition for Tesla. Despite the constant counting of how much share Tesla has in the battery electric vehicle (BEV) market, it should be noted that anyone who buys an ICE car is one less potential owner of a Tesla.

Chip Recovery Picks Up Steam

In Q1 2022, there were only two carmakers to see positive year-on-year (YoY) delivery growth: Tesla at +67.7% YoY and Toyota at +2.5% YoY (though Toyota saw declines for the rest of 2022). All others saw steep declines YoY due to the lingering automotive chip shortage, which led to idled production.

This year, however, there were five carmakers in Q1 that saw positive YoY growth: Tesla (+36.4%), Ford (+9.3%), VW (+7.5%), Toyota (+5.0%) and Mercedes-Benz (+3.4%). This is a strong sign that the chip shortage is normalizing, as 2022 saw the peak of idled production at many carmakers due to the chip shortage.

Nissan’s deliveries rose by 6.3% QoQ, a higher rate than Tesla’s 4.3% QoQ growth and another good sign that the automotive chip shortage is beginning to normalize. This is bearish for Tesla, as the higher new car inventories grow, the more new-car prices will drop, putting further pressure on Tesla’s prices. Unlike its rivals, Tesla sells directly to its customers and bears the full impact of price cuts (or price hikes between 2021 and 2022). Tesla’s rivals sell their cars to dealerships, which price-gouged during the chip shortage, and therefore, will see the brunt of price declines from increased new-car supply.

Figure-1: Q1 Delivery Growth on a YoY & QoQ Basis

All Rivals Saw Prices Rise in Q1 While Tesla’s ASPs Fell by 9%

Tesla saw the steepest price declines in Q1, with its ASPs dropping by 9% QoQ to $46,673, excluding leases and credits (IRA credits in Q1 were an estimated $185 million). This is no surprise, given the steep price cuts Tesla implemented multiple times since January. What is interesting is that Tesla failed to create a “price war” with its rivals—all of which saw their prices rise due to long order backlogs and new model launches. Tesla essentially started a price war with itself and is starting to burn serious cash.

Figure-2: Q1 Prices Rise at Rivals, Drop at Tesla

Tesla No Longer Has Industry-Leading Profitability

Tesla no longer has industry-leading Automotive gross margins or pretax profit margins. For the sake of an “apples-to-apples” comparison in Figure-3, R&D is added back to Tesla’s COGS, as are earnings from Tesla’s Service & Other division (mainly automotive repairs/servicing and used-car trading), which is how other carmakers book Automotive gross margins. The result is that Mercedes-Benz has overtaken Tesla in Automotive gross margins and Nissan is within reach if their sales expand.

Figure-3: Q1 Automotive Gross Margins: Benz is Top

In terms of pretax profit margins, Tesla ranked third after Mercedes-Benz and BMW. While Tesla could claim it had “industry-leading” margins in Q1 2022, when pretax margins hit a record high of 19.3%, this is no longer the case. While 2023 consensus estimates see Tesla generating a 12.4% pretax margin for the full year, recent price cuts in Q2 point to Tesla’s margins as low as 8.3% in 2023.

Figure-4: Q1 Pretax Profit Margins Ranked by Most Improved

2023 Guidance is Upbeat with Caution on Raw Material Costs

Figure-5 shows the guidance given at each major carmaker after their Q1 results. Note that the Japanese have the most upbeat delivery forecasts, but this is largely due to having been more production constrained than their rivals in 2022. The German carmakers had strong results, but didn’t raise guidance because of uncertainty in China and a slowdown in Europe.

While Honda had the worst results, the stock is actually up 9% since its May 11^th earnings results due to bullish guidance of 18% delivery growth in FY3/24 and a doubling of the size of its share buybacks (more detail below). What is of note is that, despite having the highest delivery growth of 36% YoY in Q1, Tesla saw its EBIT fall the most, with a 26% YoY decline, which includes regulatory credits and cost buffers from the new IRA incentives for EV battery packs made in the US. Excluding these regulatory credits, Tesla’s Q1 operating profit fell by 33%, which belies its valuations as a “growth stock”.

Consensus is Largely Bearish on Carmakers’ 2023 Profits

Except for Tesla and Honda, all other carmakers in this report had considerable earnings beats in Q1 (see Figure-5). While the Japanese just ended their March fiscal year in Q1, they came out with extremely bullish delivery and profit targets for FY3/24. All of them are growing from a low base last fiscal year, but both Toyota and Honda are targeting record high profits in FY3/24 (Toyota’s delivery targets are also a record high).

While VW is seeing slight growth this year in profits, BMW expects to see profits down by 6% and MBG expects EBIT to be “slightly down” versus 2022. There is large skepticism among investors looking at German auto stocks, given the slowdown in demand in Europe (although VW stated it has a backlog of 1.8 million vehicles there) and the massive price war going on in China’s auto market. The German carmakers have roughly one third of their deliveries coming from China and another third from Europe.

GM and Ford also see earnings being down around 6% in 2023 and Tesla has given no guidance other than saying they’ll produce “around 1. 8 million” cars in 2023. In January, Tesla guided for an “over 20%” Auto gross margin (ex-leases and credits), but summarily removed it after a considerable undershoot to 18% in Q1. That being said, current consensus for Tesla’s 2023 production is 1,878,283, so one could say that the market expects Tesla to beat by 4.3% this year.

Consensus earnings estimate are currently 2-3% below guidance at Ford, GM, and Nissan and in-line with MBG, Toyota, Honda and BMW. What raises one’s eyebrow is the 8.4% gap between VW’s midpoint EBIT guidance of €25 billion and consensus estimates of only €23.8 billion. This is possibly why VW has been one of the worst performing auto stocks since Q1 results were announced and has the lowest PER of 3.8x.

Figure-5: Q1 Results & Guidance by Maker

Except for Tesla, Most OEMs Guide for Higher Cost Headwinds

Most carmakers appear to see earnings growth headwinds from higher raw material costs in 2023. Of note is Ford’s guidance after Q1 results: it trimmed its full-year guidance of profit “tailwinds” from lower commodity/freight costs by 25% from a +$2.5 billion contribution to only +$2.0 billion. It already realized +$1.3 billion of that in Q1, so this implies possible headwinds later this year. GM reduced its raw materials/logistics guidance from being a “slight tailwind” in 2023 to only being a “neutral” factor in the Q1 report.

And all 3 German carmakers mentioned higher raw material costs and inflation as headwinds for the remainder of this year, which is another reason why they didn’t raise guidance, despite huge earnings beats in Q1. Among the Japanese, Honda and Nissan surprisingly guided for lower raw material costs in FY3/24 (neither has any significant EV exposure), while Toyota still sees raw material cost headwinds.

While Tesla would not comment on which direction their raw material costs were heading on the Q1 earnings call, they only said that there were costs they “can control”, like production efficiencies and those they “can’t control”, like raw material costs.

It seems that much of Tesla’s 3% QoQ decline in costs/unit may have come from lower component expedite costs—which must’ve been high last year in order to pump deliveries into yearend—and lower logistics expenses.

As is clear from lithium miner SQM’s recent Q1 earnings report, lithium prices should rise from Q2 after “de-stocking” in Q1. This could hit Tesla with higher costs from here, as they have multiple re-sets to long-term fixed contracts this year and those were made at prices over 80% lower than current levels pre-2022.

Figure-6: Lithium Prices to Rise from Q2

Valuations: Tesla is not “Growth at a Reasonable Price” vs Rivals

To put Tesla’s nose-bleed high valuations into perspective, it’s best to first understand why Toyota trades at a premium to its non-Tesla rivals (see valuations and returns in Figure-7).

Toyota’s PER of 10.7x is a 69% premium to its rivals’ average of 6.3x and its 7x automotive EV/EBITDA (including equity-method affiliates) is a 286% premium to its rivals’ average of 1.8x. Note that this is despite the fact that, unlike its German rivals, Toyota has yet to mass-produce BEVs. BMW had the highest amount of BEV sales as a percentage of its fleet in Q1, yet trades at a 73% discount to Toyota’s EV/EBITDA. Here are the three main reasons why Toyota trades at a premium relative to its ICE maker rivals, which shows how egregiously overpriced Tesla is, in light of its growth slowdown:

Market Share & Global Footprint: Toyota has a 47% share of its home market in Japan, which helps generate stable cash flow. Toyota is also number one in the ASEAN market with a 30% share and number two, after GM, in the highly profitable US market with a 15% share in 2022 (Tesla has no dominant share in any market and, up to now, generated most of its profits from China). While Toyota’s market share in China was 8.3% in 2022 (despite the chip shortage), one could say that this is likely the proper exposure to a car market that is shrinking due to declining wealth and population.

“Indirect” Vertical Integration: Toyota has significant stakes in its key suppliers like Denso, which can shoulder much of Toyota’s R&D burdens for ADAS, software and electronics. Toyota also owns stakes in Subaru, Suzuki and Mazda, which each contribute to Toyota’s BEV platform strategy (this is much more efficient than Tesla’s touted “vertical integration”).

Solid Financials: Toyota doesn’t necessarily have the highest net cash/equity ratio in the industry (Honda is the highest, at 29% in Q1 versus Toyota’s 13% and Tesla’s 28%), but it does have a diverse portfolio of assets in the auto industry, which if liquidated at current prices, could yield a 44% net cash/equity ratio.

In the past 22 years, Toyota has never generated negative free cash flow, not even during the Great Financial Crisis in 2008 to 2009. There is likely no other carmaker that has free cash flow generation with this amount of stability.

Tesla has only generated positive FCF for 4 years between 2019 and 2022, but as of Q1 2023, was negative again on an automotive FCF-basis (stripping out lease operations) and barely break-even on a consolidated basis.

Figure-7: 2023 Estimated Valuations & Returns by Major Carmaker

Below is a brief summary of each automaker’s Q1 2023 results and outlook discussed in this report.

Tesla: Q1 deliveries were up by 36.4% YoY and 4.3% QoQ to 422,875 units. Despite having printed the industry’s strongest year-on-year growth in deliveries in Q1, EBIT sunk by 26% YoY. This was because ASPs fell by 9% QoQ while costs/unit only fell by 3%. Tesla has already lowered prices in Q2 by another 6% QoQ as raw material costs are rising. Even if Q2 deliveries rise QoQ, it is highly doubtful that profits will follow as much. In fact, given the 6%+ price cuts made globally as of May 15^th, it’s likely that EBIT drops by another 9% sequentially in Q2. For more color on these dynamics, refer to this report on Tesla’s Q1 results here.

Toyota: Q1 (fiscal March 2023’s Q4) deliveries grew by 5% YoY and fell by 2.9% QoQ to 2.71 million units while EBIT grew by 35% YoY and beat estimates by 17%. FY3/24 targets were in line with consensus and Toyota said that their targets were conservative and “made to beat”. Toyota sees FY3/24 deliveries growing by 9% YoY (ex-China, which has yet to be disclosed, but is less than 10% of global sales) and EBIT growing by 10% YoY. Toyota had a rough year in FY3/23, as it was propping up its tier-2 and 3 suppliers, which struggled with spiking raw material costs. This alone, shaved off 36% from FY3/23 EBIT. The drag on EBIT this fiscal year should come down to 17% and should be gone by FY3/25. Nevertheless, Toyota sees at least 10% YoY EBIT growth versus a consensus view of a 10% YoY decline in 2023 EBIT at Tesla.

Honda: Q1 (fiscal March 2023’s Q4) deliveries dropped by 18% YoY and 1% QoQ to 947,000 units, which caused an EBIT miss of 35%. It was well known that Honda had lingering automotive chip shortages during the quarter, so the stock had a relief rally after results, especially given Honda’s bullish forecasts for 18% delivery growth in FY3/24 and a larger than usual share buyback program of 3.8% to flex its confidence (twice last year’s level). While Honda’s automotive profit margins barely broke even in FY3/23, the 18% growth in FY3/24 deliveries should bring margins back to around 3%, which should highly top up its motorcycle profits, which were 58% of FY3/23’s EBIT.

Nissan: Q1 (fiscal March 2023’s Q4) deliveries fell by 7.6% YoY to 895,000 units and EBIT beat by only 4%, but was up by 56% YoY. While Nissan also suffered from the chip shortage last year, its targets of 21% YoY delivery growth in FY3/24 and 6% QoQ delivery growth in Q1 are a clear sign that chip supply is rapidly recovering. Nissan’s FY3/24 EBIT target of Y520 billion ($3.8 billion) was 29% above consensus estimates. Much of Nissan’s higher than expected profit growth is coming from strong pricing of key models in the US. Consensus estimates are still 3% lower than guidance due to a rooted mistrust of Nissan’s guidance (there are decades of Nissan shareholders being “Musked” from price cuts for the sake of volume growth).

Mercedes-Benz: Q1 deliveries were up 3.4% YoY but down 6.1% QoQ to 602,368 units. EBIT, which beat by 13%, was up 58.5% due largely to a huge 15.6% EBIT margin in its Van division versus consensus estimates of 13.1%. Overall EBIT margins came in at 14.8% versus full-year targets of 12%, but MBG was also cautious with full-year guidance (like BMW). MBG had the most profitable quarter out of all the carmakers in this report, with 14% Car Division margins on strong sales in Europe, its most profitable market. The question is whether MBG can repeat this from Q2 onward, given the slowing demand in Europe’s car market and a price war in China. Consensus estimates are bang in-line with MBG’s guidance of a “slight decline” in 2023 EBIT.

BMW: Q1 deliveries fell by 1.5% YoY but rose by 6.3% QoQ to 588,138 units. Q1 EBIT still managed to grow by 11.4% YoY on stronger pricing and beat consensus estimates by 30%, while Auto EBIT came in 13% above consensus. Auto EBIT margin of 12% in Q1 was above the company’s full-year target of c9%, which was impressive, but BMW was cautious and didn’t raise 2023 guidance. The better-than-expected results were due to improved model mix and lower incentive spending (basically the opposite of Tesla on the pricing side of things). BMW also did much better than VW and Benz in China, with over 37,123 BEV sales through April, versus only 20,000 at VW and 7,300 at Benz.  

VW: Q1 deliveries grew by 7.5% YoY but fell by 7.5% QoQ to 2 million units. While EBIT beat by 15%, it was down by 32.8% YoY due to higher fixed costs and forex derivative losses. The forex derivative losses could get a pass, but VW’s overall earnings beat was considered low-quality due to the capitalization of €1.3 billion worth of R&D. If this were stripped out, VW missed Q1 consensus by 11%. VW targets 15% YoY growth in 2023 deliveries and targets an 8% EBIT margin (Q1 deliveries only grew by 7.5% and Q1 EBIT margin was only 7.5%). Q2 is off to a strong start, with 40% global delivery growth in April. Like most other carmakers, VW also sees raw material headwinds during this year, but sees them tapering off in the 2H. China is a risk, as the market is weak, and VW’s targets are high with 200,000 China BEV sales in 2023 after only selling 20,000 in Q1. Of all the carmakers covered in this report, VW’s 2023 midpoint EBIT guidance of €25 billion is the least trusted, with an 8.4% gap with consensus estimates of €22.9 billion.

GM: Q1 deliveries down 3.9% YoY and 10.9% QoQ to 1.83 million units. Q1 EBIT fell by 18.2% YoY, but beat consensus estimates by 19.6%. Despite the YoY declines, GM hiked its 2023 EPS guidance by 5.4% to $6.85, which would still represent a 9.7% YoY decline. Q1 BEV sales were extremely low relative to GM’s massive BEV launch schedule for 2023. While GM is investing at a fast pace, the Q1 results were unimpressive and the stock is down 6% since its Q1 report. Despite GM’s 5.4% hike to 2023 EPS, consensus is still 3% lower than GM’s guidance.

Ford: Q1 deliveries rose by 9.3% YoY and declined by 7.9% QoQ. EBIT grew by 57.3% YoY off a low base and recovered from a Q4 2022 loss. Ford’s results were actually impressive when considering that (a) its high-demand Mach-E electric SUV had production lines down for re-tooling for much of Q1 and (b) the F-150 Lightening line was also down due to fires in one of its battery packs. Both are ramping up again in Q2. Ford broke out its EV division’s P&L for the first time, which is respectable given that it revealed gross losses of 102%. Ford guided for positive incremental gross profits on its EVs by yearend and reiterated its 8% EBIT margin target in 2026.

Ford has put itself under the gun harder than any of its ICE rivals with the race to electrify, which is commendable. If they can attain these targets, their stock should see its valuation increase, but as of now, the market appears to still be skeptical.