Tesla: Moving The Goalposts Works Until It Doesn't
Tesla: Moving The Goalposts Works Until It Doesn't
As I warned, troubled Q4 results tracked my ests but were worse than even plunging market ests following disappointing deliveries dubiously called a "beat". My 2024 model flags more trouble ahead.
Tesla TSLA 0.00%↑ fans seemed to run out of excuses when the automaker reported on Wednesday substantially lower revenue, profit, and cash flow than expected for the fourth quarter even versus frantically falling consensus estimates.
The pressure was on after Tesla’s fourth-quarter Q4 deliveries had been called a “beat” at 484.5k (up 19.5%) versus the latest last-minute market estimate of 483k (up 19% y/y). The trouble is market estimates had been dropping weekly, daily, and even hourly before the final results were posted—which the final number clearly didn’t top. Results badly trailed the 513k (up 27% y/y) market consensus at the beginning of the quarter when I had projected best-case deliveries at a much closer 474.2k (yp 17% y/y) (see Tesla's Problem is Fading Demand, Not Disruptive Factory "Updates" on 10/4/23).
By comparison, China-based BYD Co.'s reported yet another record with 526.4k (up 60% y/y) BEVs delivered for its fourth quarter, solidly toppling Tesla as the new market leader worldwide—as widely expected.
Not only is Tesla rapidly losing sales traction and market share to increasingly robust competition, as I warned last year, but it seems helpless to stop the erosion even after more than a year of severe price cutting which has pushed prices down by 30-40% y/y.
As its pricing power has foundered, Tesla admitted on the earning call that it has come near the end of its ability to cut costs (and nefarious corners) sufficiently to avoid losses. Not even ex-CFO Zach Kirkhorn is still around anymore to smooth the rough edges (see What Really Happened to Tesla's latest Ex-CFO? on 10/23/23).
Tesla admitted it was “between two major growth waves: the first one began with the global expansion of the Model 3/Y platform and the next one we believe will be initiated by the global expansion of the next-generation vehicle platform.”
This seemed to confirm my forecasts that its growth and profit trajectories would stall this year while it failed for years to produce a robust pipeline to maintain competitive fleet relevance (as discussed in several reports like Tesla's Demand Problems Aren't Going Away, 1/31/23).
What is Tesla futzing with instead? Elon Musk’s vanity follies like robots and dubious AI “achievements” that Tesla has used to bait revenue from long-suffering buyers for Autopilot FSD features it has promised for years and never delivered—and likely never will as defined and initially sold.
Meanwhile, the modestly refreshed Model 3 Highland has received a mixed to indifferent reception in China—it sure didn’t ease the need for price cuts. Nor are the deliberately quirky and deeply flawed Cybertruck and Semi truck models going to save Tesla. As I expected, they are prohibitively expensive to produce versus logical
market pricing, they can’t be ramped up to commercial scale anytime soon, and early models have been launched with potentially unfixable design problems, poor construction, and already dicey reliability. Both are too expensive to produce, insure, and maintain, even if they manage to become well-made and reliable—which early indications suggest they will not. Worse, the Cybertruck’s ultra-hard steel skin seems inherently more hazardous to drivers, passengers, and potential crash victims that are bound to emerge soon enough.
The one promising car Tesla is working on—the only one—is the small Model 2 for China which isn’t coming until mid-to-late 2025 (we’ll see).
All this has left Tesla cowering in broad daylight with no credible cover in sight, as I expected.
Fourth quarter results suffered accordingly.
Numbers Even Worse Than They Looked
Despite to 20% increase in deliveries, reported auto sales revenue (84% of total revenue) was barely changed at $21.1 billion, up just 1.7% versus $20.7 billion last year, and up only 1.9% when I stripped out energy credits from both periods. With severe pricing cutting and expensive incentives offsetting favorable mix, average pricing fell 15% to $42.6k (lower vs my $42k est), ex-energy credits which were down 7% to $433 million.
Sales gimmicks failed to boost leasing revenue, which was down 17% y/y to just $500 million, so auto segment revenue (85% of total revenue) was up just 1.2% y/y. This was worse than the tepid 5% growth in the third quarter and marked two of only five quarters since 2015 when auto revenue didn’t record double- or triple-digit growth.
Energy generation and storage revenue was up 10% y/y but otherwise substantially weaker than the previous three quarters. It was also troubling that Service & Other revenue (up 27% y/y) was unchanged versus the third quarter at $2.17 billion which was barely higher versus the second quarter even though Tesla had sold 1.4 million additional cars during Q2-Q4. Tesla also had been forced to conduct several recalls to repair software and hardware defects on nearly every car it has produced, on top of its persistently terrible track record of reliability.
The result was consolidated revenue up less than 3.5% y/y to $25.2 billion, matching the low end of my estimated range (see Tesla's Demand Problems Aren't Going Away, 1/31/23). Again, this was the slowest growth in 3 years, much worse versus the tepid 8.8% y/y in Q3, and marked two straight of the five weakest quarters since 2015. Revenue growth has clearly stalled.
Results went downhill from there. Sharply higher costs on weaker revenue pushed auto segment gross margin down more than 700 bps y/y to 18.9%, marking the third straight quarter below even 20%. Auto segment gross margin excluding energy credit boosts was just 17.2%, down 530 bps y/y and the fourth straight quarter less than 19%.
Consolidated gross margin slumped 610 bps to 17.6%, and was just 16.2% (down 450 bps) ex-energy credit subsidies.
With SG&A and R&D rising dramatically faster than revenue at 24% y/y and 35% y/y, respectively, operating income dropped 47% to $2.06 billion, 8.2% margin (down 784 bps)—marking four straight quarters of significant decline. The margin fell to 6.6%, down nearly 600 bps, ex-energy credit subsidies.
With net income headed for a trainwreck, Tesla evoked the spirit of ex-CFO Zach Kirkhorn to conjure a Hail Mary in the form of a $5.9 billion reversal of deferred taxes on top of adding back $484 million for compensation paid in stock instead of cash. This pushed net income to a miraculous $7.9 billion, up 115% y/y and roughly 63% of net income reported for all of 2022.
Nice try. Excluding that stunt net income was down 46% to just over $2 billion, below my $2.1 billion estimate. Excluding energy credit subsidies net income was down 42% to just $1.6 billion, marking three quarters of the past four which actually declined substantially y/y.
Reported EBITDA fell 27% to $3.95 billion, with a dramatically lower 15.7% margin (down 652 bps) even versus my 16.5% estimate. If only it could be true, for EBITDA as reported also was juiced by the $433 million in energy credit subsidies plus $484 million added back from compensation paid in stock instead of cash. EBITDA fell to $3.5 billion (down 21% y/y versus similarly adjusted; 14.2% margin) ex-energy credits and was just $3 billion (down 24% y/y with a 12.3% margin) excluding also stock-based compensation.
And So It Went for Cash and Cash Flow…
Cash from operations was $4.37 billion, 17% of revenue and up 33% y/y versus disappointing results last year when CFFO fell 29% y/y. The $1 billion y/y gain wasn’t enough, however, to recover the $1.3 billion loss in Q4 last year or prevent the $1.5 billion overall decline in CFFO for the year versus the $3.2 billion gain in 2022 and the $5.6 billion gain in 2021. Moreover, the majority of the gain in the quarter, as was true all year, can be traced to energy credit subsidies plus stretching payables and receivables versus unvarnished growth in income which fell dramatically.
Cash from operations was just $3.9 billion excluding energy credit subsidies, with the 16% margin on similarly adjusted revenue topping the 12%, 10%, and 8% margins, respectively in the previous three quarters.
Shrinking cash flow is a much bigger problem as Tesla’s CAPEX remains expensive with ongoing plant expansions continuing despite fading demand in all its markets. CAPEX was up 24% in Q4 to $2.3 billion, leaving adjusted free cash flow ex-subsidies and at just $1.6 billion. This was a strong improvement versus $447 million in Q4 last year, but adjusted free cash flow for the year still declined by 52% versus 2022 to only $2.5 billion—just 4% of revenue (see attached model).
Why does this matter when Tesla reported $29 billion in cash, cash equivalents, and investments at year-end?
Because Tesla is a company that claimed it generated a record $15 billion in net income for the year when its operations actually generated only $6.8 billion in unvarnished profit—down 33% versus similarly adjusted 2022 results.
Because Tesla’s operations could only generate $2.5 billion in unvarnished free cash flow on $97 billion in revenue (see attached model).
Because Tesla’s sales momentum, market share, profitability, and cash-generating capacity have declined sharply, as I projected, ahead of a likely even more challenging year in 2024.
Because that reported $6.9 billion gain to $29 billion in cash and equivalents, like all things Tesla, is not what it seems:
Only $2.5 billion was actually generated by operations
$1.8 billion came from energy credit subsidies
$3.625 billion came from new borrowing and leases, which Tesla greatly downplays
$700 million was sold in stock
These sources totaled $8.576 billion, which suggests that reported cash & equivalents should have been higher by $1.7 billion.
So, while it’s smart for Tesla to shore up cash, it also has fostered the false impression that the company was substantially more successful and profitable and generated significantly more cash than it actually did. This greatly overstates Tesla’s ability to weather its troubling and apparently unstoppable decline which is well underway.
Total revenue for the year was $96.8 billion (up 19%) on 1.8 billion deliveries (up 38%), with reported EBITDA down 13% to $16.6 billion (17.2% margin; down 640 bps) and $6.8 billion (down 33%) in net income, excluding subsidies and unusual items. All landed dramatically below even rapidly falling market consensus, but closely tracked my estimates (see Tesla's Problem is Fading Demand, Not Disruptive Factory "Updates" on 10/4/23).
And yet, market forecasts remain amazingly ambitious, starting with the consensus projecting for full-year deliveries up 20% to 2,167,503 (albeit this is down versus the 30% boost still projected just 3 months ago.
Color me skeptical.
I expect Tesla will continue to lose sales momentum and market power at the expense of profitability and cash generation. I estimate best-case 2024 deliveries up 14% to 2,060,190, with revenue at $106.4 billion (up 10%), reported EBITDA at $16 billion (down 4%; 15% margin), and net income at $5-10 billion.
Stay tuned.
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