Tesla to discontinue models S and X

Key Concepts

• Automotive Gross Margin: The difference between revenue from vehicle sales and the cost of producing those vehicles, excluding tax credits. A key indicator of Tesla’s profitability.
• Fully Unsupervised FSD (Full Self-Driving): Tesla’s goal of achieving Level 5 autonomous driving, where the vehicle can operate without any human intervention.
• Robo Taxi Fleet: A network of autonomous vehicles providing ride-hailing services.
• Optimus: Tesla’s humanoid robot project, currently in the R&D phase, aimed at general-purpose automation.
• IRA (Inflation Reduction Act): US legislation providing tax credits for EV purchases, which expired impacting demand post-Q3.
• Basis Points: A unit of measurement equal to one hundredth of one percent (0.01%). Used to describe changes in margins.

Tesla Earnings Analysis: Q4 2023 & Future Outlook

This analysis focuses on Tesla’s Q4 2023 earnings, as discussed with Kelly, an equity analyst at TD Securities. The conversation centers on the company’s financial performance, strategic shifts, and future growth drivers.

Financial Performance & Margin Recovery

Tesla reported an earnings beat for Q4, with shares up approximately 1%. A key takeaway is the company’s resilience in the face of challenging EV market conditions, specifically the expiration of US tax credits and increased competition, particularly in China. The automotive gross margin, excluding credits, expanded by 200 basis points sequentially, marking the third consecutive quarter of margin recovery. This performance exceeded consensus expectations and is seen as a positive foundation for future sentiment. Despite lower sequential deliveries, the margin expansion demonstrates effective cost management and pricing strategies.

Product Portfolio Transition & Capacity Repurposing

Tesla is discontinuing production of its Model S sedan and Model X SUV. While these vehicles were foundational to the Tesla brand, they now represent a small portion of overall volume. The company intends to repurpose the production capacity previously dedicated to these models. Kelly emphasized that the Model 3 and Model Y currently constitute a substantial portion of Tesla’s sales volume.

The Central Role of Autonomy

A significant shift in Tesla’s strategy is the increasing importance of autonomy in driving vehicle demand. The analyst believes that autonomy and the EV side of the business are increasingly intertwined. The ultimate goal is to launch fully unsupervised FSD and integrate vehicles into a robo taxi fleet. This is expected to be a major driver of demand and a significant source of incremental revenue and profit growth. Kelly stated, “autonomy will become not only an incremental source of revenue and profit growth for the company but also potentially a major driver of demand going forward.”

Growth Drivers & Addressable Market

TD Securities maintains a buy rating on Tesla, primarily driven by anticipated catalysts in vehicle autonomy and robotics. The analyst reframed the addressable market, moving beyond simply selling new vehicles to encompass a lifetime revenue stream from vehicles and incremental services. This total addressable market in the US alone is estimated at $1.5 trillion. Tesla plans to launch robo taxi services in seven cities in the first half of the year, with unsupervised FSD expected to follow.

Optimus: A Serious Investment

Tesla’s humanoid robot project, Optimus, is considered a serious investment with significant potential. The company is actively investing in R&D, with the unveiling of “version three” planned in the coming months. While Optimus is still in the R&D phase and substantial revenue growth is a few years away, it represents an equally exciting opportunity alongside the advancements in autonomy. The analyst noted the growing industry interest in humanoid robotics, stating, “You’re seeing a lot of companies also invest in that. So, it is really forming into a sizable industry.”

Competitive Landscape in China

The Chinese EV market is highly competitive, with companies like BYD and Chery posing a significant challenge to Tesla. However, Tesla doesn’t compete in all price points. The Q4 margin beat is particularly impressive given the competitive pressures in China and the reduced US EV demand following the expiration of the IRA tax credits. The ability to expand gross margins despite these headwinds demonstrates Tesla’s resilience and provides a stronger foundation for future growth. Kelly commented, “To see um the gross margin expand despite lower sequential deliveries I think kind of puts uh more ease at some of the concerns around how Tesla would manage this more challenging time in the industry.”

Robo Taxi Launch Timeline & FSD Integration

Tesla is planning to launch robo taxi services in seven cities within the first half of the current year. The integration of unsupervised FSD is expected to drive additional services and expand the revenue pool. This is seen as a key catalyst for growth in the near to medium term.

Conclusion

Tesla’s Q4 2023 earnings demonstrate resilience in a challenging market. The company is strategically shifting its focus towards autonomy and robotics, viewing these as major growth drivers. The planned launch of robo taxi services and the continued development of Optimus, coupled with margin recovery, position Tesla for continued success. The analyst emphasizes that the company is moving beyond simply being a car manufacturer, aiming to unlock a significantly larger revenue stream through services and technology. The next few months are critical, with the robo taxi launch and Optimus updates providing key data points for investors.