In a surprising turn of events, Tesla, the leading electric vehicle manufacturer, faced a striking downfall in its stock value following the release of its third-quarter earnings report, which fell short of expectationsBetween October 17th and October 27th, the stock plummeted from $254 to $205, representing a significant decline of 19.3%. This stark reality has prompted several major investment banks on Wall Street to revise their fair value estimates for Tesla, reflecting growing concerns about its profitability and market position.
One of the most glaring revelations from the earnings report was Tesla's net profit, which amounted to $1.853 billionThis figure starkly contrasts with the previous year’s performance, showing a substantial year-over-year decline of 44%. Additionally, the company’s overall revenues reached $23.35 billion, marking a mere 9% increase—the lowest growth rate seen in three years
The market’s attention, however, shifted towards the company's gross margin, which dropped to 17.9% in the third quarter, down from 18.2% in the second quarter, marking the fifth consecutive quarter of decline and hitting a four-year low.
Seth Goldstein, a prominent analyst at Morningstar, expressed concerns regarding the impact of Tesla's ongoing price reductions on its profitabilityWith the company expected to further cut car prices in the fourth quarter and the new Cybertruck model set for deliveries, the predictions indicate a continued downward trajectory for profit margins in 2024. Goldstein argued that, in the long term, Tesla's gross margin could recover as production stabilizes and demand for its new subscription-based autonomous driving software increases.
Despite the bleak outlook, Goldstein has adjusted his fair value estimate for Tesla to $210 per share, down from $215, signifying his cautious stance
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He has advised investors to remain vigilant and refrain from entering the stock market until a more favorable safety margin is evident in Tesla’s pricing.
Conversely, analysts at Ping An International remained more optimistic, setting a target price of $275.1 for Tesla’s stockThey noted the company's dominant position in the global electric vehicle market and its unwavering capacity for cost reductionHowever, they acknowledged that the upcoming two years might present challenges as the launch and ramp-up of the Cybertruck could pressure margins and necessitate significant research and development investments.
During the investor call on October 19, Elon Musk elaborated on the various challenges and risks facing Tesla
He highlighted concerns regarding high interest rates impacting vehicle purchases, the financial prospects of the Full Self Driving (FSD) system, and the commercialization of the CybertruckMusk conveyed a surprisingly cautious tone, particularly concerning consumer behavior in the current high-interest-rate environment, hinting that buyers may now focus more on monthly payments rather than vehicle pricesHe metaphorically likened Tesla to a grand ship weathering a storm, acknowledging the challenges ahead.
The fears surrounding Tesla’s ability to meet its ambitious delivery target of 1.8 million vehicles for the year have also intensifiedIn the third quarter, Tesla produced 430,500 vehicles and delivered 435,100, marking a 6% decrease from the previous quarterHowever, some analysts, like Shen Daxiang, remain confident that Tesla can achieve this target, predicting total deliveries of 1.82 million for 2023 and a substantial increase to 2.34 million in 2024.
The Future of Energy Storage Appears Bright
Tesla's Valuation Remains Reasonable
In the wake of the earnings report, a fresh wave of comparisons between Tesla and its rival BYD emerged
The gap in vehicle sales is steadily narrowingIn the third quarter, BYD sold 431,600 pure electric vehicles, a 23% increase from the previous quarter, falling short of Tesla by just 3,400 unitsAnalysts like Vincent Sun from Morningstar believe BYD will maintain its strong sales momentum, projecting total vehicle sales for the year to reach 2.9 million, a significant increase of 55% year-over-year, while also upwardly revising BYD's sales forecast for 2023-2025 by 5-7%.
Indeed, BYD's performance has seen remarkable growthAccording to the earnings preview released on October 17, the company anticipates a third-quarter net profit ranging from 9.546 billion to 11.546 billion yuan, representing a year-over-year increase of 67% to 101%. With its strong lineup built upon advanced blade battery technology and DM-i, BYD is well-positioned in terms of range and energy efficiency.
In contrast, Tesla is significantly ramping up its investment in research and development, with R&D expenses rising by 58.39% year-on-year in the third quarter to $1.161 billion
Tesla asserts that the prudent approach in the current high-interest-rate climate is to focus on R&D and capital expenditures that will support future growth.
Currently, Tesla’s energy storage division is one of its most profitable and promising areasThe company reported $1.559 billion in energy generation and storage revenue for the third quarter, reflecting a robust 40% year-over-year growthTesla’s energy storage product deployments surged by 90%, reaching 4.0 GWhThis segment has contributed over $500 million in quarterly profits, illustrating the significance of this division in Tesla’s overall financial picture.
Notably, the California Megafactory has successfully completed its second phase of expansion, boosting production capacity to 40 GWh
The Shanghai energy storage facility has plans for an initial annual production capability of approximately 10,000 commercial energy storage batteries, with a total energy storage scale nearing 40 GWh, designed to cater to the global market.
Additionally, the forthcoming Cybertruck and the artificial intelligence development project Dojo are regarded as pivotal areas for Tesla’s future growthMusk revealed that there are already one million reservations for the Cybertruck, which is slated to begin deliveries on November 30 at the Texas factoryHowever, during the earnings call, he made a rare attempt to temper market expectations regarding the vehicle’s revenue potentialHe noted that achieving mass production of the Cybertruck and generating positive cash flow at an affordable price point would require substantial preparatory work, estimating that the vehicle may not deliver significant cash flow contributions for another year to a year and a half.
The unfolding narratives across Tesla’s various business segments suggest a multifaceted approach to valuation