🚘Tesla: Bigger than Apple?🚘 - by App Economy Insights

Hello there! 👋

Greetings from San Francisco!

Welcome to the new members who have joined us this week!

Join the thousands of How They Make Money subscribers receiving insights on business and investing every week.

Tesla (TSLA) reported its Q3 FY22 earnings last week.

Today, we’ll cover the following:

1. Tesla Q3 FY22.
2. Recent business highlights.
3. Key quotes from the earnings call.
4. What to watch looking forward.

Tesla is one of the most popular companies on Wall Street.

It’s the quintessential growth stock. Bulls focus on the tremendous long-term potential, while bears point out execution risks and valuation.

So, what should you know about Tesla’s quarter?

Let’s dive in!

1. Tesla Q3 FY22

Tesla primarily makes money from selling/leasing electric vehicles (87% of revenue), followed by services (7%) and energy generation & storage (5%).

Despite the company's intense efforts to ramp up production, it still can't keep up with demand. So a critical factor in Tesla’s performance is its production of vehicles.

Key metrics:

• Total production 366K vehicles (+54% Y/Y).
• Total deliveries 344K vehicles (+42% Y/Y).

Income statement:

Here is a bird’s-eye view of the income statement.

Data source: Shareholder Letter.

This Week in Startups recently featured our Tesla chart. Jason Calacanis and Molly Wood explain why these charts are excellent for digesting an earnings report.

This Week in Startups @TWiStartups.@Jason & @mollywood break down $TSLA's Q3 earnings with the help of some really insightful charts... thanks! @EconomyApp @ycharts @forwardcap

1:36 AM ∙ Oct 21, 2022147Likes19Retweets

Main highlights:

• Revenue grew 56% Y/Y to $21.5 billion (missing expectations by $0.5B).
• Gross margin 25% (-2pp Y/Y).
• Operating margin 17% (+3pp Y/Y).
• EPS (non-GAAP) grew 69% Y/Y to $1.05 (beating expectations by $0.04).

Some notes:

• Auto revenue has a 28% gross margin. The other segments (energy and services) have a much smaller gross margin profile (9% and 4%, respectively).
• Tesla is very lean, with only $1.7 billion in operating expenses (8% of revenue), including $0.7 billion in research & development (3% of revenue).
• My favorite financial metric is the operating margin. We want it to increase over time to show that the company is demonstrating operating leverage. Tesla’s superior margin profile (> 15%) makes the auto industry a poor comparison.

Cash flow:

• Operating cash flow was $5.1 billion (24% margin).
• Free cash flow was $3.3 billion (15% margin).

Balance sheet:

• Cash, cash equivalent, and marketable securities: $21.1 billion.
• Long-term debt: $6.4 billion.

Two temporary headwinds adversely impacted Q4 numbers:

• Adverse foreign exchange impact of $250M on operating profit (which was also partially to blame for the revenue miss and lower gross margin).
• Cost of production ramp at Gigafactory Texas (Austin) and Berlin-Brandebourg and ramp of 4680 battery cells. Excluding regulatory credits and Austin/Berlin ramp costs (all non-recurring by nature), the auto gross margin would have been nearly 30%.

Q4 FY22 Guidance:

Management continues to forecast a 50% average annual growth in vehicle deliveries over a multi-year time horizon. Musk expects a record-breaking “epic” Q4, though logistical and supply chain issues could keep deliveries slightly below 50% growth.

Is the business sustainable?

Management estimated Tesla has sufficient liquidity to fund the product roadmap, long-term capacity expansion plans, and other expenses. Moreover, with a substantial net cash position and excellent cash flow margins, Tesla is well-positioned to fund its growth path forward.

Additionally, the company’s margin profile could improve over time with software-related profits (primarily Full Self-Driving) complementing hardware.

2. Recent business highlights.

• Stock buyback: The board debated the idea of buying back TSLA stock, up to $5-10B. Musk believes they’ll do some meaningful buyback next year.
• Autopilot and Full Self-Driving (FSD): Tesla has seen great success with its AI Day, with a spike in applications from top AI researchers. They plan a wide release of FSD beta in North America by the end of the year. Musk believes Tesla is safer in FSD mode (vs. non-FSD mode). He even said that FSD is safe enough to have no one in the car by the end of next year (we’ll have to see). The chart below illustrates the cumulative miles driven in FSD beta (approximately 160,000 Tesla drivers), which shows acceleration as more drivers test out the FSD feature.

• Battery: Tesla is moving as fast as possible to achieve 1000 Gwh per year of battery production in the US (not including suppliers), vertically integrated.
• Federal EV tax credit: Tesla plans to fully meet the IRA (Inflation Reduction Act) for batteries. They believe they can capture a significant share of these tax credits for storage, solar, and EVs.
• Next-generation vehicles: Tesla is trying to reduce the cost of making a new vehicle by half and exceed the production of all other vehicles combined.
• Tesla Semis: In December, Tesla will be handing over its first production of Semis (heavy trucks) to Pepsi. They are aiming for 50,000 Tesla Semis in North America in 2024.

3. Key quotes from the earnings call

Elon Musk on Tesla’s potential:

“I’m of the opinion that we can far exceed Apple’s current market cap. In fact, I see a potential path for Tesla to be worth more than Apple and Saudi Aramco combined. So, now that doesn’t mean it will happen or that will be easy. In fact, I think it will be very difficult. It will require a lot of work, some very creative new products, manage expansion and always the luck. But for the first time, I am seeing -- I see a way for Tesla to be -- let’s say, roughly twice the value of Saudi Aramco. And I think that’s -- I haven’t quite seen that yet. I mean, this is the first time I’ve seen that potential.”

For context, Apple (AAPL) and Saudi Aramco (a state-owned investment company of Saudi Arabia) are the biggest companies in the world, each north of $2 trillion in market cap. But, of course, if Tesla ever reaches a $4 trillion+ market cap, these two companies might be much bigger by then.

Twice the value of Saudi Aramco is roughly six times Tesla’s current valuation.

In his bold projection, Musk does not include Optimus (more on that later).

“I think we’ve got the most exciting product portfolio of any company on earth, some of which you’ve heard about, some of which you haven’t.”

About future demand:

“I can’t emphasize enough, we have excellent demand for Q4, and we expect to sell every car that we make for as far into future as we can see […] We are still a very small percentage of the total vehicles on the road. Of the 2 billion cars and trucks on the road, we only have about 3.5 million. So, we’ve got a long way to go to even reach 1% of the global fleet.”

For context, here is a look at Tesla’s market share by region.

4. What to watch looking forward

The report was not surprising, with a performance in line with the long-term guidance.

The company is very lean, well-funded, and demonstrates operating leverage.

So what’s the catch?

First, TSLA is valued at ~45 times EBITDA, so it needs to continue to deliver on its growth story to justify its valuation.

Great ambition is fantastic, but it will still need execution. Some shareholders might wonder to what extent other Musk-owned companies like SpaceX or Twitter could divert his attention away from Tesla.

The crux of the Tesla bull case is around its execution as a technology company (as opposed to a car manufacturer). They want to address some of the world’s most challenging problems (self-driving transportation, productivity).

If Tesla can solve Full Self Driving and capture that value through software-related sales, it could dramatically improve its long-term prospects.

Beyond autos, the company revealed the Optimus robot at Tesla AI Day. The robot walked, waved, and danced on stage in a brief demo. The Institute of Electrical and Electronics Engineers does an excellent job explaining the diverse reactions from the robotics community. In short, Optimus has tremendous potential, but it’s still a long shot.

That’s it for today!

Stay healthy and invest on!

Subscribe to How They Make Money so you don’t miss any updates.

Disclosure: I am long AAPL in the App Economy Portfolio. I share my AAPL rating (BUY, SELL or HOLD) with App Economy Portfolio members here.