Tesla Q4: Stalling Growth, Shrinking Margins, Weaker Guidance, Mystery "Investment"

Tesla's big miss on Q4 deliveries turned into stalling revenue growth, sharply lower margins, & reduced guidance—as I expected. So what's the mysterious $4.4 billion "investment"? Asking for a bird.

Tesla TSLA 0.00%↑ fourth quarter results tracked revenue and profit expectations which have been falling steadily since October on increasing concerns over stalling demand plus brand damage caused by CEO Elon Musk (see Tesla Q4 Deliveries: Bigger Miss Than Even I Expected on 1/2/2023 and Tesla Q4: Elon's Burning It All Down, 12/30/2022).

Until recently. The idea now is that Tesla’s latest and largest price cuts yet (by some 20-30%, including subsidies) have fixed all its problems in all its markets and will supercharge demand across the board.

Investors reversed the sharp decline in Tesla’s stock, which at Friday’s close at $177.90 is up 75% versus the two-year low hit a month ago. The stock still is down 54% versus the peak hit last November.

Never mind that Tesla slashed prices several times during the fourth quarter on top of adding ever more expensive incentives like discounted insurance premiums and free supercharger credits. This, as I projected at the time, were only enough to pull demand forward from December into November before the luster faded. I project this again with the latest price cuts.

Or that Tesla’s notoriously inflated operating margins have been hit hard, as I expected, as the reality of forced price reductions amid inevitably tougher market conditions versus sharply higher costs settled into its income statement.

Some people have started worrying that Tesla might be, gasp, just a car company after all. Welcome. I addressed that argument years ago in Things People Believe: Flat Earth, Faked Moon Landings, and Tesla $2100 (4/23/2020).

I’ve also been concerned that Tesla is burning a lot more of its shrinking cash while also gutting further its ability to revive its flagging competitive momentum.

It looks like I’m right to remain concerned since Tesla apparently doesn’t expect the problem to go away any time soon. The company quietly replaced its $2.4 billion secured ABL Credit Facility last week with a more expensive 5-year unsecured Revolving Credit Agreement with much higher borrowing limit of $5 billion—expandable to $7 billion.

Interestingly, some of Tesla’s original CF banks elected not to sign on as lenders to this much larger credit line. This implies lower confidence by its banks in Tesla’s ability to comfortably manage the indicated ramp up in debt it plans.

So why, then, did Tesla spend an unexplained $4.4 billion on a mystery “investment”?

Feeling The Heat

Recall that I have warned that Tesla’s troubled fourth quarter would be a disturbing confluence of accumulated weak trends—mostly self-inflicted—that I have been tracking for years. As I projected, again, at the end of 2021:

Indications are that Tesla’s long stretch of luck and lavish indulgence may be coming to an end. Musk’s billions, brags, insults, and rants have overshadowed growing concerns that can’t be ignored for much longer, like struggling Model 3 same store sales trends I’ve been tracking for years. Like Tesla’s shrinking market share in key markets from robust competition winning buyers spooked by its own notoriously poor build quality in it cars plus its dismal customer service. Like eroding margins from seemingly inflated levels which likely will worsen through next year.

Add emerging consequences from Tesla’s notorious false and misleading full-self-driving (FSD) claims, sneaky “fixes” of serious problems instead of recalls as required, dicey accounting, increasingly significant recalls as years of shoddy manufacturing and apparent coverups are revealed, and escalating government probes may expose all manner of ugliness to the world.

I long have projected that many, if not all of these negative factors may begin to coalesce next year, particularly in the second half. If so, Tesla could struggle increasingly versus record results this year.

Look Away From Elon Musk To Gauge Tesla's Prospects—and Looming Risks, 12/31/21

All these factors hit hard in the fourth quarter, which resulted in dramatically lower deliveries versus expected:

Tesla trailed badly versus my forecast and rapidly falling market consensus—and, again, Tesla’s own forecast for 50%y/y growth—with Q4 deliveries at 405,278, up 31.3%.
Tesla Q4 Deliveries: Bigger Miss Than Even I Expected, 1/2/2023

As I expected, the weakness was led by tepid deliveries in China, where Tesla typically generates most if not all of its profits. China contributed only 30% of total deliveries vs 38% last year. That’s because China sales were up only 5% y/y for the quarter after plunging 41% y/y in December.

Revenue was hit with the lower than expected deliveries plus weaker pricing, offset by $791 million in boosts from from higher energy credit sales of $467 million (up 49%) plus $324 million recognized in deferred revenue from a reported “wide release” of the controversial “FSD Beta in the US and Canada.”

Automotive sales at $20.71 billion (up 35%) were lower versus my $20.97 billion estimate, even the boosts described above. So, even with slightly higher leasing revenue versus my estimate, total auto segment revenue at $21.307 billion (up 33%) was lower versus my $21.45 billion estimate.

Strong energy and services revenue topped $3 billion, up 72% and higher than I figured, so consolidated revenue was $24.5 billion (up 37%) versus my $24.1 billion estimate (up 35% excluding the boosts noted above). Either way, well below guidance indicated near 50% growth.

Profit suffered further as costs rose much faster than revenue, especially when we focus strictly on reported automotive operations (not smoothed by leasing sales & costs). Costs for automotive sales were up more than 44%—a comparative hit of $1 billion versus last year—which dropped gross margin by 484 bps y/y to 25.5%. Excluding the boosts cited above, adjusted gross margin fell 670 bps to 22.2%.

Automotive segment gross profit overall, which includes leasing operations, was little better at 25.9% (down 466 bps y/y) and 23.1% (down 600 bps) excluding boosts.

Tesla salvaged that $1 billion jump in automotive costs by slashing SG&A nearly in half by $1.2 billion to 4.4% of revenue vs 8.4% last year and shaving another $206 million (20%) off already meager R&D to 3.3% of revenue versus 4.2% last year.

With rising production costs wiping out the entire gain in sales y/y, slashing overhead by $1.224 billion plus the $791 million in boosts cited above accounted for the entire increase in reported profit. As a result, reported EBITDA was $5.4 billion was up $1.3 billion (22.2% margin, down 86 bps). Net income was $3.69 billion, up $1.37 billion (15% margin).

As always, Tesla’s profit is even less than it seemed. Without the energy credit sales and the plug from deferred revenue, for example, unvarnished EBITDA was up only 21% versus similarly adjusted last year to just $4.6 billion—just 19.5% margin, down 223 bps and worse versus my 20% margin estimate. Recall also that Telsa elects to add back stock-based compensation expense, which juiced EBITDA this quarter by $419 million. Excluding SBC, EBITDA margin was only 17.7%.

These are important distinctions because, as I long have warned, Tesla is not only less profitable than it reports, it also generates far less cash versus reported. Reported cash from operations was $3.3 billion, down $1.3 billion (-29%). The decline without the $1.224 billion saved by cost cutting would have doubled. Even then, cash actually generated from operations was only $2.45 billion, down 43% without the boosts from energy credit sales and deferred revenue. This barely covered $1.86 billion in