Tesla Inc. (TSLA, Financial) is the world’s largest maker of electric vehicles and the market leader across many countries. The company reported solid financial results for the second quarter of 2023 last week, with a beat on both the top and bottom lines. However, price decreases and a decline in profitability upset investors and the stock fell by close to 8% shortly after earnings were announced.
In this discussion, I will break down its results in detail before reviewing the valuation for the stock. Let’s dive in.
Electrifying revenue growth
Tesla reported solid financial results for the second quarter of 2023. Its revenue of $24.93 billion topped analysts' forecasts by $200.35 million and rose by 47.2%. Despite the tough macroeconomic environment, this increase was greater than the prior quarter's 24.4% growth rate. Earnings per share of 91 cents also exceeded estimates of 82 cents.
Despite being often referred to as a technology company, Tesla's core automotive business contributes 85% of total revenue. The business generated $21.27 billion of revenue in the second quarter, which increased by 46% year over year.
Sales in its energy generation and storage business grew by a blistering 74% year over year to $1.51 billion. Tesla’s services and other revenue rose by a solid 47% year over year to $2.15 billion.
Partnerships and developments
During the quarter, Tesla also scored surprising partnerships with both Ford Motor Co. (F, Financial) and General Motors Co. (GM, Financial), giving them access to its EV charging infrastructure.
The rival automakers will now have access to 12,000 of Tesla's fast-charging stations. This move was criticized by some analysts, but I believe it will be a positive overall for Tesla, as effectively the company can act as a “toll road,” charging a commission on usage.
In addition, GM will install Tesla’s North American Charging Standard into its EVs starting in 2025.
The company also announced the first production of its Cybertruck at its Austin, Texas facility. This includes over “10,000 unique parts and processes.” While CEO Elon Musk admits it is “difficult to predict the ramp initially,” “high volume” is expected by next year, with low deliveries starting this year.
Profitability was challenged
Tesla reported profitability challenges as its gross profit margin slid 7% year over year, from 25% in the year-ago quarter to 18%. This was mostly driven by the company reducing its prices in order to meet lower demand.
The company slashed the price of its Model 3 by 11% and Model Y by 20% in the first quarter of the year, with further reductions anticipated throughout 2023. The average price of a Tesla vehicle is now just over $45,000, down from close to $56,000 in the second quarter of 2022.
On a positive note, this made more of the models eligible for the EV tax credit scheme, making the vehicles more affordable for consumers. This is important given competition is heating up. General Motors plans to release its electric Chevy Blazer in the later half of 2023 and its more affordable Chevy Equinox is expected to be launched in 2024.
Ford also launched its F-150 Lightning, which is an EV version of the most popular vehicle sold in the U.S. Luckily for Tesla, the Ford EV had some battery issues, which resulted in disrupted production. However, I expect a solid rebound in the second half of 2023.
Moving onto Tesla’s operating profit, its margin dropped from 14.76% last year to 9.62% in the second quarter. This was driven by higher costs for its batteries and a lower-valued U.S dollar, which impacted international revenue.
Tesla is ramping up production of its in-house designed batteries, called the 4680, which should help with greater efficiency long term.
Self-driving and AI
Tesla’s research and development costs also jumped to $943 million, up a substantial 41% year over year.
This may seem negative, but I actually think it makes sense given the huge opportunity in the artificial intelligence industry, specifically with its Dojo training computers. The company wrote in a shareholder deck that it is focused on “being at the forefront of AI development.”
The company aims to develop its Dojo supercomputer to create an Amazon Web Services-style, AI as a service offering.
During the earnings call, Musk took a hit at “a lot of AI companies” doing “large language models. He said, “If they are so great…why can’t they make a self-driving car? …Because it is harder!”
Musk is known for his optimistic timescales, but admitted he is “the boy who cried FSD” when he promised a full self-driving car back in 2017.
Tesla’s full self-driving technology is gradually improving as it has completed more real-world self-driving miles than any other EV maker due to the sheer number of customers that signed up for its beta testing program.
“I think we will be better than a human by the end of this year,” Musk said.
If or when Tesla does finally achieve full self-driving, that will be a game-changing moment as it could disrupt a multitude of industries, from ridesharing to the railroad.
Valuation
Tesla trades with a price-sales ratio of 9, which is lower than its historic levels of over 30.
The GF Value Line also indicates a fair value of around $448 per share based on its historical ratios, past financial performance and future earnings projections. Thus, the stock is undervalued according to this metric. However, GuruFocus does warn of a possible value trap, but I believe this is unjustified as its lower margin is expected.
Final thoughts
Tesla is a tremendous company and is truly innovating on multiple fronts. The company has a lot in its pipeline, from its Dojo supercomputer to self-driving vehicles and even robots. As the company stands, it is the market leader in EVs and has a huge opportunity in other areas. Investors will likely experience volatility in the short term due to the tough macroeconomic evironment, but there is huge long-term potential.
