Market Story - Tesla- how Musk's promises turned to profit

Tesla finished Q4 2022 with a net profit of $3.7 billion, while net profit for the whole year amounted to $12.6 billion. Elon Musk's company more than doubled its profits compared to the previous year, despite the collapse of the share price and sales problems in China. In early years, Tesla investors focused on the vision and promises of its charismatic CEO rather than actual results, however recently companies showed what is capable off, as evidenced by the chart below. Especially in such a tough economic environment.

2020 was a breakthrough year, although not for the EV sales

The year 2020 was exceptional for the EV maker, as it managed to end the financial year with a positive net result for the first time. This success was partially achieved thanks to higher demand for electric cars after the rather unsuccessful debut of the Model S and Model X, launched in 2012 and 2015, which failed to generate significant revenue. Interestingly, if we take a closer look at the results from 2020, it turns out that Tesla did not generate its profit from its core business. The year-end net profit reached $721 million, however it was mainly driven by sale of so-called carbon credits worth nearly $1.6 billion. 

Phenomenal 2021- expansion of its core business

Although in 2021 Tesla also earned about USD 1.5 billion from the sale of carbon credits, it also managed to expand its core business. Tesla increased the number of deliveries by 87% and reduced costs per car produced, which ultimately resulted in a gross profit margin of 25%. The automaker maintained that margin in 2022 despite higher commodity prices, which was likely driven in part by a 40% increase in vehicle deliveries compared to previous year and an increase in carbon credit sales of nearly $300 million to about $1.8 billion.

Twitter hiccup 

Despite achieving record results, Tesla shares suffered heavily in 2022 due to the takeover of Twitter by Elon Musk. Waves of layoffs, changes to core social networking features, and accusations by some prominent investors against Musk for allegedly mis-setting his business priorities have seen the stock price plummet from $313 in mid-September 2022 to just over $101 in the first week of January 2023.

Musk is currently mired in disputes related to the acquisition of Twitter. The controversial billionaire, however, sees Twitter as an essential tool that could help  Tesla's further expansion. During Wednesday's conference call Musk said:

"Let me check my Twitter account. OK, so I've got 127 million followers, and it continues to grow very rapidly," Musk said. "That suggests that I'm reasonably popular. Now, I might not be popular with some people, but for the vast majority of people, my follower count speaks for itself."

"I'm the most interacted social media account, I think maybe in the world, certainly on Twitter," the billionaire added.

"I think Twitter's actually an incredibly powerful tool for driving demand for Tesla. And I would really encourage companies out there of all kinds, automotive or otherwise, to make more use of Twitter and to use their Twitter accounts in ways that are interesting, and informative, entertaining," Musk said.

Potential for 2023

In mid-January, Tesla launched its best-selling Model Y Long Range AWD, which prices start from $52,990 in the US. The new price marks a reduction of $13,000, or 20%. Additionally, the discounted price keeps the Model Y below the $55,000 limit that can be used for tax incentives, under a change in federal regulations that went into effect on January 1. Tesla also significantly reduced prices for the Model 3 compact sedan, Model S mid-size sedan, and Model X mid-size crossover.

Edmunds, an online car buying and review guide, reported on Jan. 19 that searches for Tesla brands more than doubled to 4% from 1.9% in the previous week, before the price cut ws announced. The Tesla Model Y was the second most searched model after the Honda CR-V. The site records over 20 million visits per month.

Musk plans to increase production in 2023

Elon Musk said that in January the company recorded the largest YoY increase in orders in history, exceeding twice the production capacity.

Musk also expects that 2023 will be a quiet year without significant supply chain disruptions and the company has the potential to produce 2 million cars which should find buyers. The statement sparked euphoria among investors.

• Tesla expanded its production capacity - across all its factories - in order to produce 100,000 Model S and X vehicles per year and 1.8 million Model Y and Model 3 vehicles.

• Production capacity in Shanghai allows Tesla to produce 750k. Model 3 and Model Y vehicles per year, while its first factory in Fremont, California is able to produce 100k of its more expensive Model S and X vehicles and 550k Model 3 and Y vehicles. Factories in Austin, Texas and in Germany may produce up to 250k Model Y vehicles per year.

• Tesla also said that approximately 400k customers in North America now have the opportunity to test its experimental, "FSD Beta" driver assistance system.

Conclusions

Despite the fact that Tesla's results only slightly topped market estimates, investors once again focus on bright future prospects presented by the company's charismatic CEO. Outlook looks promising and seems to have rational foundations, however, it will be interesting to see how Tesla will deal with approaching recession, which may significantly verify the company's optimistic plans.