Tesla Inc. (TSLA, Financial) recently released its first-quarter earnings report, which was met with a large drop in the share price due to the company missing Wall Street expectations. Make no mistake, Tesla has been facing quite a few headwinds recently, but the long-term growth picture remains intact, and there are some points that imply Tesla's outlook is actually improving despite increased competition and margin compression.
Misses and margin cuts
While the company reported earnings of 85 cents per share in line with average analyst estimates, net income came in at $2.51 billion, a 24% drop from the previous year. Tesla's core segment, automotive revenue, reached revenue of $19.96 billion in the quarter, up 18% from last year, and the company reported total revenue of $23.33 billion, up 24% year over year, which was slightly above analyst estimates. However, the company's gross margin dropped to 19.39% due to a series of price cuts on some of its vehicles, reflecting an erosion of profitability and competitive moat as more competitors enter the EV race.
Tesla has been cutting the prices of its vehicles over the last few months, with the latest cuts taking place before the earnings release. The company recently slashed the price of Model Y vehicles by $3,000. This marks the sixth price cut in the U.S. this year and the second reduction this month. Tesla also reduced prices for its vehicles in Europe, Israel and Singapore.
CEO Elon Musk defended the price cuts, saying, "We've taken a view that pushing for higher volumes and a larger fleet is the right choice here, versus a lower volume and higher margin."
In early April, Tesla reported vehicle deliveries of 422,875 in the first quarter with production slightly higher than deliveries for the same period at 440,808 vehicles. Recent data shows that total vehicle sales in the U.S. for February were 15.38 million, down 6% from January but up 8% year over year. This year, many EV makers have faced challenges to growing sales due to the weakening economy and competition, and Tesla does not seem to be an exception.
Tesla faced multiple legal disputes and production issues recently as well. The company was required to recall over 360,000 vehicles in February due to a software flaw in the self-driving feature that was determined to be a safety hazard. In March, the National Highway Traffic Safety Administration launched an investigation into reports of Tesla steering wheels coming off while vehicles were being driven. This investigation covers approximately 120,000 vehicles.
The bright spots
While vehicle sales declined, Tesla reported a significant surge in its energy revenue, which reached $1.53 billion in the first quarter, a 148% increase compared to the same period last year. The company also revealed that its energy storage systems deployment increased to 3.9 GWh, which is a remarkable 360% rise. These energy storage systems, which utilize lithium-ion batteries, include Tesla's home backup battery, known as Powerwall, and the Megapack system that allows utilities to store and use more energy generated from intermittent renewable sources such as solar and wind. The company has already announced its second 40 GWh Megafactory in Shanghai, with construction starting later this year.
In the first quarter, solar deployments grew by 40% year over year to 67 MW but decreased sequentially due to unpredictable weather and other factors, as well as supply chain disruptions in the solar industry. Further, revenue and gross profit from the Services and Other segment achieved record highs during the quarter, with healthy margins for used vehicle sales. Although Supercharging remains a small part of the business, it continues to expand as the network opens up to non-Tesla vehicles. Supercharger Network continued to grow in the quarter, with a 33% year over year increase, expanding from 3,724 stations in the first quarter of 2022 to 4,947 in the latest results. This significant growth further cements Tesla’s leadership in the EV industry. The company's focus on expanding the Supercharger Network is strategic, especially as Tesla opens up its rapid charging system to non-Tesla electric vehicles. This move could potentially accelerate the adoption of electric vehicles globally, which would play into Tesla’s advantage in the long run.
Despite the challenges faced by the company, Tesla is charting ambitious plans for expansion with increased capital expenditures. According to a January SEC filing, Tesla expects to spend between $7 billion and $9 billion in 2024 and 2025 to expand its business. The company expects to produce 1.8 million vehicles this year, with a possible upside volume of 2 million vehicles.
My take
Tesla is off to a disappointing start this year, and the company is likely to face many new challenges in the coming quarters as global EV sales are predicted to grow at a slow and steady pace this year in comparison to the record growth seen in the last couple of years. Despite these challenges, the company's long-term prospects remain bright at a time when the world is aggressively pursuing net-zero emissions targets. Tesla's aggressive push into the clean energy sector positions the company to become a big winner in the ongoing transformation of the global energy sector and the company is strongly positioned to benefit from the continued adoption of electric vehicles as well. Overall, I believe any weakness in Tesla's stock price presents an opportunity for long-term-oriented growth investors.
