We were obviously disappointed by the stock price performance of Tesla (TSLA, Financial) in 2022 and in the fourth quarter. Regardless, we believe the company’s fundamentals remain attractive. Chinese production and deliveries were both impacted last year by shutdowns of its plant and less demand from Chinese consumers due to COVID. Also negatively impacting demand in the U.S. in December were purchasing deferrals due to consumer tax incentives starting in early 2023. As a result, Tesla cut prices for its electric vehicles (EVs) in the period which created investor concerns about demand and the impact on gross margins. In January, Tesla experienced “unprecedented” demand, with orders about twice daily production! We believe the significant increase in demand for Tesla EVs will reduce the impact of lower prices.
Tesla is the lowest cost provider for its high-quality EVs and is continuing to lower production costs. In addition, new manufacturing facilities in Berlin and Texas should ramp this year helping increase production capacity and eliminate margin drag from start-up costs.
The company will also benefit from the Inflation Reduction Act, which we expect will boost Tesla’s profits and volumes. Starting on January 1, 2023, most consumers will receive a $7,500 credit to buy an EV, and Tesla will benefit from a $3,500 tax incentive. Combining its strong 50% EBITDA to cash conversion rate and its strong balance sheet, with over $22 billion in cash and nominal debt, we think the company is in a strong position to weather the current volatile environment.
Tesla, Inc. manufactures EVs, related software and components, and solarand energy storage products. Shares fell due to growing investor concerns regarding volume and pricing dynamics as demand appeared to be pressured by a potential recession and higher interest rates. In addition, following Twitter’s acquisition, CEO Elon Musk dedicated a material portion of his time to the company and sold Tesla shares to fund the transaction, driving investors’ concern regarding his dedication to Tesla. We remain confident in Tesla’s fundamentals and management team.
From Ron Baron (Trades, Portfolio)'s Baron Focused Fund fourth-quarter 2022 letter.
