Tesla's Q1 Fundamentals Were Much Worse in the 10-Q
5 parts of the 10-Q that should raise eyebrows
Tesla’s Q1 results were bad enough when they released their Shareholder Deck on April 19th and the stock is down 11% since then. But the more detailed 10-Q filing Tesla released on April 24th shows that Q1 earnings were even worse than expected. Here are some key parts of the 10-Q that should raise eyebrows:
IRA Credits Booked in Revenues, Not Regulatory Credits: While Tesla did not disclose how much their IRA credit revenues were in Q1, they noted that IRA credits were booked in Automotive Revenues. This is odd because there is a separate category on the Income Statement specifically for Regulatory Credits. By booking IRA credits in revenues, Tesla boosted Automotive gross margin (ex-leases and ex-credits) by 81 bps, from a real level of 17.5% to their reported 18.3% margin (see Figure-1 and details below). Tesla’s CFO had guided for “over 20%, ex-leases and credits”.
US Revenues Fell by a Sharp 9% in Q1: Automotive Revenues in the US saw a steep 8.8% QoQ drop in Q1. “Other” regional revenues—mostly Europe—fell by 7.5%, while China revenues grew by 10.4% QoQ due to currency tailwinds and the full volume effect from the bargain price cuts made in Q4 2022 (see Figure-2 and details below).
R&D at Record Lows: Excluding stock-based compensation (SBC), Tesla’s R&D dropped by 11.8% YoY and is at not only its historical lows, but also industry lows as a percentage of sales (see Figure-3 and details below). One would’ve thought that they’d be investing more in new products, given that their aging fleet has led to multiple price cuts this year.
Inventory Hits New Record High: By Tesla’s count in its Shareholder Deck, Q1 vehicle inventory rose by 20% QoQ, but Finished Goods Inventory was actually up 32% QoQ (see Figure-4 and details below). Tesla likely has more inventory on hand than they’re actually disclosing.
IRA Credits Inflated Gross Margin by 81 bps
On the Q4 earnings call in January, Tesla’s CFO guided for a “pure” automotive gross margin of 20% (ex-leases and credits) with an average selling price (ASP) “above $47,000”. In the 10-Q Tesla published on Monday, it turns out that Tesla booked IRA credits in Automotive Revenues, which is odd, given that IRA credits should be be booked in the category of “Automotive Regulatory Credits”. Booking IRA credits in Automotive Revenues effectively boosts “pure” Automotive gross margin, the key metric that Tesla’s CFO used in guiding for “over 20%” back on the Q4 earnings call in January.
Tesla had mentioned in January that IRA credits should be around $150 to $250 million per quarter this year. The IRA credit sales in Q1 came to at least $185 million, by my estimates, which boosted pure Automotive gross margin by 81 bps to a pro-forma 18.3%, versus what should’ve been 17.5%. Stripping out the IRA credits from sales also leads to an ASP of $46,673, which is below the January guidance of “above $47,000”.
The IRA credits provide $10/kWh for the battery pack and $35/kWh for battery cells, so a total of $45/kWh per battery pack. This means that the Model Y, which has an 82-kWh battery pack, receives $3,690 in IRA credits, with $2,870 for Panasonic’s cells and $820 for Tesla’s pack.
But we don’t know the real split between Tesla and Panasonic. If it’s a 50/50 split, Tesla could take $1,845/unit, which means that Q1 IRA credits booked in Automotive Revenues could’ve been as high as $344 million. This would’ve dragged down pure Automotive gross margin down to 16.8%, from a reported 18.3%.
Panasonic is set to report its March quarter results on May 10th, so there should be further details, as the IRA credits are more impactful for Panasonic and management already told investors about this being a large earnings boost for them on their September quarter earnings call. Panasonic’s share price is up 20% since then.
Figure-1: Tesla’s Q1 Pure Auto Gross Margins Ex-IRA Credits
US Regional Revenues Drop the Most in Q1
Assuming that most of the Energy division’s revenues are in the US and excluding them from US regional revenues disclosed in the 10-Q, it appears like Tesla’s Q1 Auto revenues there declined by 9% QoQ. The weaker dollar provided a currency tailwind in “Other” regional revenues—mostly Europe—but revenues here were also down, with a decline of 7.5% QoQ. China bounced back by 10% QoQ due to the fact that it was the first market to see steep price cuts from October 2022 (US fully kicked in from Q1 and the EU had their first cuts in Q1) and deliveries rose 13% QoQ on the sugar high from the discounts.
Both China and EU deliveries need to grow significantly in Q2 if there is no further currency tailwind, as it significantly boosted Q1 overseas revenues (e.g. China revenues only grew by 6% QoQ on a yuan basis, but 10% on a USD-basis).
Figure-2: Tesla’s Regional Revenues
SG&A/Sales % Down Due to Historically Low R&D
Excluding stock-based compensation, Tesla’s SG&A only grew by 3% YoY despite 24% YoY revenue growth in Q1. Even more baffling is that this comes as Tesla’s Austin and Berlin factories are in full ramp-up mode now and weren’t operating in Q1 2022. Tesla achieved this by cutting R&D.
On an ex-SBC basis, while SG&A grew by 16% YoY—due to the two new factories ramping up—R&D dropped by 12% YoY, keeping overall SG&A to only increase by 3% YoY. It led to a R&D (ex-SBC)/sales ratio of 2.7% (see Figure-3), which is a record low for Tesla and below any other carmaker in the world (the average is 5.5% these days).
This is amazing when one considers the upcoming Cybertruck launch in Q4, the next-generation “50% lower-cost” platform that Tesla raved about at Investors Day in March, as well as the need to simply launch new models (the Model Y currently makes up 68% of global deliveries).
Given the next-generation platform, the new models to be built on it, Optimus (the Tesla bot that Musk said would be worth more than the auto business one day), etc., it’s hard to see how R&D can be further trimmed from here. In fact, SG&A has to rise and should become an earnings headwind henceforth.
Figure-3: Tesla’s R&D is at Historical & Industry Lows
Vehicle Inventory Likely Higher than Stated
By Tesla’s count, Q1 inventory only increased slightly to 15 days’ supply, from 13 days’ supply in Q4 2022. Given that established carmakers see “ideal” inventory at 60 days’ supply, this sounds extremely low. But it’s not. While Tesla doesn’t disclose their vehicle inventory on a unit basis, they do tell you how they calculate the number for “days of supply” in their Shareholder Deck (see note 1 on the bottom of page 6 in their Q1 2023 Shareholder Deck).
This implies that Q1 inventory was 84,575 units, up by 20% from Q4 2022’s level of 70,248 vehicles. The Deck doesn’t break down Inventory listed in the balance sheet, but the 10-Q does and Finished Goods Inventory rose by 32% QoQ to $4.6 billion. Taking this a step further by dividing Finished Goods Inventory by Q1’s average cost/unit, implies a 36% QoQ increase in vehicle inventory (see Figure-4). While the 119,231 units of implied inventory by this method in Q1 may not be precise, the magnitude of increase should be closer to reality than Tesla discloses in their Shareholder Deck.
Figure-4: Tesla’s Record Vehicle Inventory in Q1
This huge spike in inventory is a clear sign of how much weaker demand has been versus Tesla’s expectations. Q1 marked the fourth quarter in a row where Tesla produced more cars than they could sell. And the negative impact on free cash flow (FCF) is huge, as higher inventories in Q1 led to a 23% QoQ drop in operating cash flow, while capex rose by 12%. In Q4 2022, rising inventories pushed down the sum of net income + depreciation by 44% and became a 50% drag in Q1.
In the 10-Q, Tesla also raised their capex plans for 2023, which had been between $6 to $8 billion as of January, but was raised to $7 to $9 billion, which will also be the range for 2024 and 2025, they stated. This heightens the risk of negative FCF in 2023, as Tesla hasn’t changed its plans for 1.8 million units of production this year, while having raised capex by 14%. Excluding stock-based compensation, Q1 FCF barely broke even.
Tesla only has the Cybertruck in their new product pipeline over the next 3 years and it will mostly sell in North America. The broader question is, without something to replace the Model Y—68% of Q1 global deliveries—the margin of error for Tesla to avoid cash incineration from here has become razor thin.
Thanks for your work.
Brad thank you for finally acknowledging Optimus even if you did so dismissively. Eventually you will understand.
I don't really have much else to say except for what I've said before you are concentrating on the financials but Tesla is not a financial company. You are concentrating also on the cars but Tesla is not a car company. If you look at the mission Tesla is outperforming anyone's wildest expectations and the world is moving at breakneck speed towards EV. If you look carefully at Master Plan 3, the energy aspect will be the next big submission from Tesla, but since it's harder to wrap your head around than car units I know many analysts like yourself will ignore it.