Blogs -Tesla’s Margins: How Low Will They Go?

Tesla’s Margins: How Low Will They Go?


August 31, 2023

author

Knox Ridley

Portfolio Manager

As the I/O fund looks to position itself for the remainder of 2023. Fundamentally,  we’re avoiding ‘Crocodile Jaw’ situations where the stock price is going up but fundamentals are decelerating. This is one of the reasons we greatly reduced our Tesla position for a ~60% gain. 

Tesla stock has rallied through most of 2023 during a time when consensus was estimating sales to grow +23% y/y but earnings to decline 15%. The main driver behind the decline in earnings estimates is that Tesla has decided to lower prices to increase volumes at the expense of margins.

Starting in Q322 through Q223, operating margins have declined from 17.2% to 9.6%. Initially, Tesla cited making sure certain models qualified for the EV tax credit and later higher interest rates as the primary reasons for lowering prices.

Higher interest rates are effectively a price hike that increases monthly payments for those who finance their purchases. Tesla recently announced 84 month financing to lower monthly payments. Reducing the sales prices also helps lower monthly payments. Meanwhile, increasing EV inventory at dealerships and discounting at an industry level are likely another contributing factor.

However, the challenge of higher interest rates is not unique to Tesla. All OEMs face the same obstacles. Below are reported operating margins for the major global OEMs from Q322 through Q223. Either they were relatively stable for the Germans and Koreans or bottomed in Q123 and have improved in the case of the Japanese.

Despite this, Tesla is the one OEM whose operating margins have continued to decline.

OEM operating margins graph

 Source: Y-Charts

It’s Not Just Macro

This highlights that there are other forces at work beyond the macro. We believe it points to Tesla implementing a pricing strategy to gain market share. Taking into consideration the competitive factors at work will help in trying to decipher Tesla’s pricing strategy and how that will impact operating margins for the remainder of 2023. It is through this competitive analysis framework that we will try to parameterize how low Tesla operating margins can go.

For this analysis, we chose to focus on reported group operating margins. Although this metric includes non-EV businesses, we believe it’s the most objective and public measure to provide an apples-to-apples comparison across the auto landscape globally.

At the end of Q422, Tesla's operating margin was 16%. To provide some context, at the time this was greater than the German OEMs. Tesla had firmly positioned itself in the premium segment.

The Germans have been dealing with their own challenges integrating EV offerings, and have been trying to catch-up with Tesla. Perhaps sensing its competitive moat within the premium market was fortified, this gave Tesla an impetus to lower prices further to attack the mass market segment. In Q223, Tesla’s operating margins declined to 9.6% after enacting a series of price cuts.

Currently, this is how Tesla’s operating margins compare to its main competitors. As can be seen below, Tesla’s Q223 reported operating margins are below those of most of the major US, German, Japanese and Korean OEMs.

OEM operating margins

Source: Y-Charts

How Low Can Operating Margins Go?

Strategically, Tesla will likely continue to lower prices to increase its leading EV market share to stave off competition which will intensify over the next few years. Tesla’s electric market share peaked at 78% in 2018 and stood at 62% in 2022.   By 2026, Merrill Lynch estimates it will decline to 18%

2026 EV market share estimates

Source: Merrill Lynch

In the most recent Q2 call, both Elon Musk and Zachary Kirkhorn, former CFO, signaled Tesla‘s focus will continue to be on volumes.

Musk 

“So, I think it’s sort of, it would be -- I think it -- it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.”

Kirkhorn

“We continue to work towards our goals of maximizing volumes on our vehicle business … in a way that generates the capital to continue our pace of R&D and capital investments.”

Through this competitive analysis framework, we believe Tesla’s Q3 operating margins can decline to a level between Honda and VW. Taking the midpoint, operating margins may go to 7.8% compared to most recent 9.6%. If operating margins were to reach a level closer to -- or below GM perhaps --- that could be sign they’re close to the bottom. This highlights the broader concern for investors in that Tesla has not provided any parameters nor guidance to assess how low margins may go. It is why we significantly reduced our position.

We have two base cases.

Base Case 1 is that Q3 operating margins are between Honda’s and VW at 7.8%.

Base Case 2 is more bearish in that they reach GM’s at 6.2%. For now, we believe Base Case 1 is the most likely. Consensus opm estimates are higher and consensus will have to revise down their Q3 and Q4 operating profit estimates if either case materializes.

tesla operating margins

In the medium term, there are reasons to be optimistic that Tesla’s strategic moves may bear fruit and its margins will rebound. In addition to lowering prices, the move from the CSS to Tesla’s NACS EV charging standard may help Tesla take market share away from those who have not yet announced plans to shift to NACS. Namely, Toyota and Honda who together have 25% automotive market share in the US. Meanwhile, Tesla deserves credit for maintaining its premium brand perception despite lowering prices. For now, the Tesla brand is almost synonymous with EVs. The refreshed Model 3  may further strengthen Tesla’s position in the minds of consumers.

Sign up for I/O Fund's free newsletter with gains of up to 221% - Click here

Tesla’s Price Action:

We continue to see a bifurcated market, which has been one of the leading themes in 2023. Some markets/stocks have likely put in tops, while big tech, especially those names perceived to be involved in AI, suggest another high is likely. Tesla falls into this camp, where one more high is still on the table before we have to deal with a bout of extended volatility. You can read more about our broad market analysis here.

The question for Tesla investors is whether the January low was a major low, or do we have one push lower before a major low is struck? There are some stocks, like NVDA and NFLX, for example, that will likely see similar bouts of volatility in the coming months, yet they have a high probability of making a lower high. Tesla could fall into this category.

There are two large counts that I’m tracking based on the current price information that account for these scenarios.

  • Blue – The big picture here has TSLA making a higher low in the coming period of volatility. The key to this count will be a large pullback that both holds $147 and is a 3-wave retrace. If this happens, it will be setting up a great buying opportunity.

    On a shorter-time horizon, TSLA has ended the topping region from $300 - $325. We could see one more swing into the $325 region. This will be very strong resistance to monitor, if we get another push. The August low around $213 will be very important. If we break below this level, then it is likely the top is in.
  • Red – on a shorter time horizon, the above analysis applies to both counts. Where this one differs will be in the pattern of the larger retrace.  Instead of a 3-wave retrace, it will have to be a 5-wave pattern that breaks below $147. If this happens, the odds will be quite high that we will see one more low before a major buying opportunity presents itself.
tesla chart

If you own Tesla stock, or are looking to own Tesla, we encourage you to attend our weekly premium webinars, held every Thursday at 4:30 pm EST. This week, we will discuss Tesla, as well as a handful of other AI plays – what our targets are, where we plan to buy as well as take gains.

Recommended Readings:

Gains of up to 403% from our Free Newsletter.

Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

+344% on Nvidia

+403% on Bitcoin

+218% on Roku

*as of March 15, 2022

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds. 

beth

More To Explore

Newsletter

https://images.prismic.io/bethtechnology/93644c8f-e9e6-4b61-944f-d7ebc957628a_Palantir+Stock+Surges+From+Artificial+Intelligence+Platform.jpg?auto=compress,format

Palantir Stock Surges From Artificial Intelligence Platform

Palantir’s Q4 earnings confirmed an acceleration in its US commercial business as it closed out its first GAAP profitable year. Shares are reflecting the optimism surrounding Palantir’s commercial seg

February 20, 2024
AI Chip

AI Driving Acceleration For Big 3 Cloud Stocks

Big Tech’s participation in the market’s push to all-time highs is becoming increasingly narrow, with Nvidia, Meta, Microsoft and Amazon serving as the primary contributors to 2024’s rally.

February 13, 2024
Apple Can't Save This Tech Rally

Apple Can’t Save This Tech Rally

In this article, I lay out both the bull and bear cases for 2024 and beyond. Interestingly, both are calling for a level of volatility in 2024 that will, at least, retrace the rally we’ve seen since N

January 31, 2024
Coinbase, Robinhood: Examining The Impact Of Spot Bitcoin ETFs

Coinbase, Robinhood: Examining The Impact Of Spot Bitcoin ETFs

The SEC approved nearly a dozen spot Bitcoin ETFs on January 10 in what was heralded as a “watershed” moment for the crypto industry, opening the door for investors to gain exposure to Bitcoin without

January 30, 2024
Tesla Store

Tesla Q4 Earnings Preview: Margins Likely To Slip Again

Tesla’s Q4 earnings are on tap after the market close on January 24, closing up a year in which aggressive price cuts helped the automaker top Q4 delivery estimates reach a new record and narrowly bea

January 23, 2024
Social Media Stocks: One Metric Shows Meta's Clear Leadership

Social Media Stocks: One Metric Shows Meta’s Clear Leadership

Social media stocks Meta (META), Pinterest (PINS), and Snapchat (SNAP) enjoyed strong gains in 2023 as the broader ad market stabilized and fundamentals improved. Social media ad spend is expected to

January 16, 2024
Nvidia Building

Five Top Stocks Of 2023: Year In Review

The Nasdaq 100 capped off 2023 with a return of +53.8%, erasing 2022’s losses and recording its highest annual return since 1999. This year had countless winners, but 5 stocks surprised and shocked th

January 09, 2024
Ad Spending Growth to Accelerate in 2024

Ad Spending Growth to Accelerate In 2024

Ad-tech stocks have generally enjoyed strong returns in 2023, buoyed by a rather fierce tech rally. Ad spending growth showing initial signs of stabilizing in the back half of the year, with ad spend

January 01, 2024
My Firm called the Bitcoin's Bottom; Here is Where the Price Goes Next

My Firm called the Bitcoin’s Bottom; Here is Where the Price Goes Next

Bitcoin is susceptible to a noisy, bifurcation between bulls and bears with extreme statements, such as: “Bitcoin will go to a $1 million” or “Bitcoin is a ponzi scheme and will go to $0.” The truth i

December 21, 2023
Palantir Building

Palantir, Three Other Cloud Stocks Poised For An Acceleration In 2024

Cloud stocks have been a mixed bag for investors heading into the end of the year, as a handful of names — Confluent, Sprinklr, HashiCorp, Bill, Paycom — plunged following their earnings reports with

December 19, 2023
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio of 30 positions, a private forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2024
Get Free Weekly Analysis on the Best Tech Stocks