Can Tesla deliver 2 million cars in 2023?
Tesla aims to grow production by 50% each year but fell short of this goal in 2022 when output climbed 47% to 1.3 million vehicles. Deliveries grew at a slower pace of 40%.
The company said it is aiming to produce 1.8 million cars in 2023, which would once again be below its target. That is in-line with the 1.86 million cars forecast by Wall Steet. However, this guidance appears to be on the cautious side and management see a chance that it can grow volumes over 50% this year.
‘Our internal production potential is actually closer to 2 million vehicles, but we were saying 1.8 million because, I don't know, there just always seems to be some freaking force majeure thing that happens somewhere on earth. And we don't control if there's like earthquakes, tsunamis, wars, pandemics, etc. So, if it's a smooth year, without some big supply chain interruption or massive problem, we actually have the potential to do 2 million cars this year. We're not committing to that, but I'm just saying that's the potential,’ CEO Elon Musk said.
Tesla says there is no issue with demand
Musk said the most common question put to management ahead of the results was about demand and defended the company’s position.
‘Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production,’ he said. ‘It's hard to say whether that will continue twice the rate of production, but the orders are high,’ said Musk.
But pricing will be key as far as Musk is concerned. The CEO said he believes there are a ‘vast number of people that want to buy a Tesla car but can’t afford it’.
‘And so, these price changes really make a difference for the average consumer. And sometimes for those -- for people who are well -- who have a lot of money, they sort of forget about how important affordability is. And it's always been our goal at Tesla to make cars that are affordable to as many people as possible so I'm glad that we're able to do so. And yes, so I think it's a good thing, all things considered.’
Tesla has been slashing prices in recent months and recently reduced them across the US and Europe by as much as 20% following cuts made in Asia. Some of this is down to easing inflation and the reversal of price hikes made last year, but investors remain worried because Musk has previously warned that tougher times are on the horizon and that a recession is coming, confessing that this could force Tesla to prioritise volume growth over profitability.
There are some early indicators that Tesla’s recent price cuts in China have had the desired effect after reports suggested average daily sales in the country between January 9 and January 15 rose 76% from the same period the year before, according to data compiled by China Merchants Bank.
That will be welcomed considering most had anticipated weaker demand in January and February because some attractive subsidies expired at the end of 2022 and demand usually drops off ahead of Chinese New Year. The fact Tesla outperformed the wider market, with electric and hybrid vehicle sales in China rising 36.5% in the same period, suggests Tesla’s strategy to drive demand through lower prices is working – and investors will be hoping for a similar reaction in the US and Europe following the latest price cuts.
While a price war could cause a shake-out of the electric vehicle industry over the coming years, this could be good news for Tesla. Tesla is the only pure-play electric vehicle maker that makes a profit and one of its biggest advantages is the superior profitability it boasts not just over its smaller electric vehicle rivals but also traditional automakers. Tesla’s operating margin came in at 17% in 2022, which Musk said was ‘the highest among any volume carmaker, I think maybe among any carmaker.’ That is a huge advantage in a price war as it means Tesla’s superior margin allows it to make deeper cuts than rivals without the risk of slipping into the red.
‘We are taking a view that we want to keep making and selling as many cars as we can. We believe we can keep pushing for strong volume growth while retaining the industry's best operating margins,’ Musk said.
Chief financial officer Zach Kirkhorn said he believes Tesla can maintain its automotive gross margin above 20% and for selling prices across its range of models to average around $47,000. Tesla is also making headway in countering lower prices with lower production costs as its newer factories in Berlin and Austin ramp-up. Markets are more optimistic and think margins will remain above 25% throughout 2023.
(Source: Estimates from Bloomberg)
Tesla Q4 earnings round off record year in 2022
Tesla reported a 33% year-on-year rise in revenue in the fourth quarter of 2022 to meet market expectations at $24.3 billion. Operating profit rose 49% to $3.9 billion and fell short of the $4.2 billion forecast.
That meant annual sales in 2022 rose 51% to $71.5 billion and operating profits more than doubled to $13.7 billion. Free cashflow jumped 51% to $7.6 billion. All these metrics hit new records.
Wall Street believes it will be another record-breaking year for Tesla, even if growth is forecast to be far slower than what we have seen in recent years. Analysts expect annual revenue to grow 31% in 2023 and for operating profit to climb at a slower pace of 17%.
Tesla investor day
The next big event is the Tesla investor day pencilled-in on March 1, which will be live streamed from its Gigafactory in Texas. ‘Our investors will be able to see our most advanced production line as well as discuss long term expansion plans, generation 3 platform, capital allocation and other subjects with our leadership team,’ Tesla has said.
Investors will also hear about the new Cybertruck that will be launched in 2023, although it is not expected to make a material contribution toward volumes or financials until it achieves scale in 2024.
How are markets reacting to the Tesla earnings?
Tesla has done enough to convince markets that there is enough demand and that it has several advantages over its rivals as competition intensifies and markets brace for a recession. Tesla shares are up over 5% in extended hours trade and set to open at their highest level in over a month when markets open this morning.
A number of brokers also raised their target price on Tesla following the update, including Cowen & Co to $140 from $122, Citigroup to $146 from $137 and Wells Fargo to $150 from $130.
Where next for TSLA stock?
Tesla shares have recently broken out of the downtrend that could be traced back to September and the results are set to see the stock open at $152.35.
The results have provided the catalyst needed to break above the $146.50 level of resistance that it has failed to break above over the past three sessions. It will now test the 50-day moving average, which has run parallel to the downtrend and could provide a new ceiling going forward. Recapturing this metric would allow it to target a larger jump toward $167 before the December-high of $$199 comes back into the crosshairs. The update could help the stock build more momentum considering the rise in volumes we have seen since December.
Any renewed pressure risks plunging the stock back toward the $108 level of support seen at the start of 2023, which needs to be maintained to avoid bringing the two-year low of $101.80 into play.
Take advantage of extended hours trading
Tesla released earnings after US markets closed and most traders must wait until they reopen today before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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