Tesla reported record quarterly results in what was one of the most important earnings results in many years for the EV manufacturer. After a year full of drama from Musk’s Twitter purchase, China lockdowns, a harsh bear market and demand question marks, Tesla has reassured investors that production would continue to ramp up, setting a target of 1.8 million vehicles delivered in 2023.
Gross margins, one of Tesla’s most impressive fundamentals, are starting to fall and could have further come down. Inflationary pressures, high raw material costs and recent price cuts will have an impact, but for context, gross margins are still exceedingly high compared to the broader auto market. However, it seems that Musk is focusing on volumes to gain market share rather than margins.
Musk flexed his financial muscles on the call, noting Tesla has USD$20 billion cash on hand, a pretty healthy sum to survive whatever this murky economic backdrop throws at them.
Wall Street will like this report with realistic delivery numbers and strong demand from its January price cuts, alleviating concerns. What’s clear is that the easy ride for Tesla is over. Musk now needs to navigate Tesla through what he calls an uncertain economic environment and the most intense challenges since Tesla rose to the world’s largest automaker.”
Tesla 2023 Outlook: Fighting the global slowdown in car sales, Europe the market to watch
Electric vehicle stocks have come under pressure in the last year, with the poster child of EVs, Tesla, feeling the full effect. This has been led by the triple impact of demand concern, production/supply chain issues, and normalising valuations. All these elements baked into Tesla’s share price that fell 65% in 2022.
Despite setting record deliveries in Q4, growth slowed to an annual delivery rate of 40%, and the quarterly number missed market expectations at 405,000 vs 431,000 expected. Elon Musk stuck to his 50% annual growth target throughout the year, leaving investors disappointed after its result despite the record numbers. This points to the high standards Tesla has set itself over the years and just how much Wall Street and investors expect.
This has begun to create an opportunity for long-term investors, particularly as demand is still strong, supply chains are better, and valuations re-enter normalisation, with Tesla’s forward P/E ratio falling from 130x to 22x in a year, before moving back around 32x after its recent rally.
The global slowdown, not only EV sales take a toll
The slowdown concern from investors for EV’s is warranted, but it needs context. The slowdown is for all cars, not just EV’s. A car is the second largest purchase most will ever make and faces falling consumer confidence, rising financing costs, and rising car prices. S&P Global sees new vehicle sales globally reaching 83.6 million in 2023, with Electric Vehicle sales reaching in excess of 10 million, putting EV penetration at 13.3% of the global car market. Although this would represent a slowdown in overall EV growth from 2022, it would still signify growth of EV penetration on global vehicle sales.
Total vehicle sales for 2023 are set to see growth of just 5.6% year over year, which points to broader weakness in global demand for vehicles as consumers leave the new vehicle segment as inflation, interest rates, and record-high vehicle prices bite. Despite headwinds, long-term forecasts remain unchanged, with EV sales in China, Europe and the US set to outstrip all other engine sales by 2030, continuing to benefit Tesla who dominates the EV market globally.
Key markets: Europe on the rise
China is key to Tesla’s outlook, but Europe will likely play a big part in the 2023 Tesla story with more substantial incentives, particularly with the Model 3 the top-selling EV in Europe and a transition away from fossil fuels amid the energy crisis following Russia’s invasion of Ukraine. China is pulling subsidies for EVs, ending over a decade of fiscal support for new electric vehicle sales, which could see a slowdown in EV deliveries through China in 2023 after years of hypergrowth.
As more and more countries set ambitious targets for transitioning to electric vehicles and reducing greenhouse gas emissions, the demand for EVs is only set to increase. This could provide significant growth opportunities for Tesla, both in terms of vehicle sales and in its energy storage and solar businesses. But the key for Tesla is if demand holds strong through 2023, with profitability and margins firm, together with Musk back at the helm.