Stock of the week - Tesla (05.01.2023)

During the first trading session of 2023, Tesla (TSLA.US) shares posted a double-digit decline amid weaker-than-expected Q4 2022 delivery data. Market expectations were inflated by the statements of Tesla's CEO, Elon Musk, who repeatedly announced that the fourth quarter will be "epic".

In Q4, Tesla delivered a record ~405K vehicles (however below market expectations of 427K vehicles). Although 2022 vehicle deliveries growth of +40% y/y in the current macroeconomic environment can be considered as relatively solid, however this figure fell well short of the management expectations of  nearly 50% growth.

Investors fear that Elon Musk's acquisition of Twitter will draw his attention away from Tesla, which could put further selling pressure on its stock.

New product launch plans

Tesla remains on track to launch its two major new products, the Tesla Semi truck and the Cybertruck. The Cybertruck is currently being developed in Texas, where beta construction is underway and production is scheduled to begin around mid-2023. In addition, Semi began initial deliveries in December, with the first few units handed over to Pepsi. The board indicated that it would take about a year to go into full production mode, with the (initial) target of producing around 50,000 units in 2024. The introduction of these new products will transfer the EV maker into two entirely new segments, unlocking a significant increase in demand.

Tesla suspends production in Shanghai

Reuters reported that Tesla has suspended production at its Shanghai factory amid rising COVID cases among workers. Shutting down the Shanghai plant would affect production of Tesla's best-selling Model Y.

Deliveries drop in Q4

Tesla announced on Monday that it had delivered 405,278 cars in Q4, below analyst estimates of 427,000 vehicles. Company failed to meet market expectations despite the fact that new plants in Texas and Berlin are steadily ramping up production. Demand for cars is expected to decline this year as consumers fear the looming recession and rising interest rates. However, while delays in supply chains may pose a short-term challenge, in the long term, Tesla could outperform the market by ramping up production and releasing new models. Therefore, deliveries are expected to increase in the long-term  supported by rising production at Berlin and Austin plants, as well as the introduction of new models, including the Semi and Cybertruck.

Although Tesla's deliveries figures disappointed in Q4, the long-term trend remains favorable despite the negative economic outlook. The company's market advantage allows it to pass on production costs to consumers by increasing the prices of all models, which protects the top-line growth prospects.

Participating in the electric vehicle segment is a necessity, not an option

Fuel consumption and vehicle emissions are strictly regulated around the world. Companies that do not meet the standards face fines or may have to negotiate with competitors who exceed the standards. Those in power in the EU, California and New York are pushing to phase out internal combustion engines, in many cases by 2030-35. The US recently increased the fine to $15 for every 0.1 miles per gallon below the standard, multiplied by the number of non-compliant vehicles sold. In turn, the EU fines €95 for every g/km of excess emissions per vehicle.

Tesla's electric vehicles meet government standards. However, as competitors increase production of zero-emission cars, the segment's revenue source may shrink. In addition, in H1 2022 Stellantis paid $678 million in penalties related to US fuel economy standards.

Electrification has been a source of differentiation and a valuation bonus for automotive companies that have to adapt to the fact that internal combustion engines will soon be phased out.

In many cases there are interim goals. For example, California intends to ban the sale of ICE vehicles by 2035, but 35% of cars sold in the state will have to be zero-emission by 2026 (16% today) and 68% by 2030. As a result, companies such as Tesla have been able to earn a premium by selling zero- and low-emission electric cars. Given the above and market forecasts, the electric car market could double in the next five years, which could be a long-term growth driver for Tesla

Summary

Long-term prospects for Tesla in the face of the ongoing electrification of the automotive industry seem optimistic and should positively affect margins. In addition, moderate expectations related to 2023 resulting from a lower base in 2022 and weak global macro sentiment may lead to better than expected quarterly results this year. While Tesla is not immune to the effects of an economic downturn, its growth and profitability could prove much more resilient to a global recession compared to the rest of the sector, taking into account the company's competitive advantages.