Tesla: Possible Margin Compression Ahead

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TSLA's Potential Margin Compression In FQ1'23 Is A Real Concern

Tesla, Inc. (NASDAQ:TSLA) has reigned king successful nan world EV market, peculiarly attributed to nan tremendous measurement maturation and stellar margins frankincense far.

In FY2022, nan company delivered an impressive 1.31M (+40% YoY) vehicles, while producing 1.37M (+47% YoY). At that time, it had reported fantabulous automotive revenues of $77.55B (+51.9% YoY), automotive gross margins of 26.5% (inline YoY), full operating margins of 16.8% (+4.7 points YoY), and EPS of $4.07 (+80% YoY).

While BYD Company Limited (OTCPK:BYDDF) (OTCPK:BYDDY) mightiness had reported amended EV balanced deliveries of 1.86M (209% YoY) successful 2022, its margins were not comparable to TSLA indeed. The Chinese automaker recorded gross margins of 16.1% (+3.1 points YoY), adj. operating margins of 5.2% (+3.1 points YoY), and adj. EPS of $0.83 (+434.7% YoY) successful FY2022.

For now, we deliberation investors looking astatine TSLA's and BYD's January 2023 deliveries successful China shouldn't beryllium alarmed, since nan little numbers were apt attributed to nan Chinese New Year festivities.

However, pinch nan uncertain macroeconomic outlook perchance impacting demand, it seems TSLA has decided to prosecute successful an all-out value warfare successful nan US and China alike. Its determination to trim prices successful nan US stemmed from nan Inflation Reduction Act, requiring sedans to beryllium priced beneath $55K and SUVs beneath $80K to suffice for nan $7.5K taxation credit. Its flagship Model Y and Model 3 now costs $57.99K and $42.99K, respectively, suggesting a alteration of -$8K and -$4K from 2022 prices.

In China, nan EV subsidies besides ended by 2022, leaving consumers pinch a minimal 10% acquisition taxation exemption done 2023. Therefore, it made consciousness that TSLA had slashed prices to lucifer nan expired EV subsidies (originally worthy 12.6K Yuan) while likewise enticing buyers astatine a clip of uncertain reopening cadence. Its Model 3 and Model Y now unit astatine 229.9K Yuan and 259.9K Yuan, little by 36K Yuan and 29K Yuan from 2022 prices, respectively.

This strategy has worked successful our position and contributed to nan surge of request successful nan US, pinch nan wait times for Model Y increasing to 17 weeks by February 2023, compared to one week successful November 2022. A akin inclination was observed successful China, pinch unit request growing by 36% YoY to 25.68K vehicles successful January 2023.

Therefore, it was unsurprising that TSLA's Shanghai Gigafactory had targeted an eager accumulation output of 20K vehicles play successful February and March 2023, compared to December 2022's compressed levels of 13.94K.

While this portion of news whitethorn constituent to a surge successful accumulation and transportation measurement successful FQ1'23, we stay concerned astir its margins successful nan short term. With nan Model 3 and Y comprising 94.6% of nan company's deliveries successful 2022 astatine 1.24M vehicles, nan effect whitethorn beryllium tremendous indeed.

The US accounted for nan mostly of TSLA's revenues astatine $40.55B aliases 49.7% successful 2022, pinch marketplace analysts estimating a 252K of nan Model Y deliveries successful nan country. Considering this information, nan Model Y mightiness person accounted for $16.62B of income successful nan US then, pinch astir 400K vehicles of Model 3 delivered astatine nan aforesaid time. Naturally, this was aft discounting portion of its revenues for power procreation and storage.

Based connected a mean +10% QoQ maturation successful accumulation output and transportation for FQ1'23, we whitethorn spot a imaginable -$550M top-line effect for Model Y and -$330M for Model 3 successful nan US, attributed to nan value cuts offered frankincense far.

The institution likewise delivered 439.77K vehicles successful China for 2022, comprising $18.14B aliases 22.2% of its revenues. Based connected akin assumptions, nan heavy discounts successful China whitethorn besides trigger a -6.13B Yuan aliases nan balanced of -$900M top-line headwind successful our estimation.

This is nan logic why we deliberation we whitethorn spot TSLA present underwhelming FQ1'23 revenues of astir $23.9B. This suggests an summation of 27.4% YoY alternatively of nan awesome maturation recorded successful FQ4'22 astatine 37.2% YoY and FQ3'22 astatine 55.9% YoY.

Despite nan presumption of easing proviso concatenation and improved accumulation standard holding nan costs of equipment sold [COGS] steady, nan company's operating margins whitethorn still beryllium impacted, falling to astir 13.5% by FQ1'23, compared to nan FQ4'22 levels of 16% and FQ1'22 levels of 19%.

While our estimated EPS of $0.90 whitethorn propose a somewhat optimistic capacity for nan adjacent quarter, against nan much bearish statement estimate of $0.85, it besides indicates a notable headwind by -24.3% QoQ from $1.19 and -15.8% YoY from $1.07. Therefore, it remains uncertain if TSLA banal will beryllium capable to clasp connected to nan caller optimism done April 2023 successful our opinion.

So, Is TSLA Stock A Buy, Sell, Or Hold?

TSLA 1Y EV/Revenue and P/E Valuations

S&P Capital IQ

TSLA is presently trading astatine an EV/NTM Revenue of 6.25x and NTM P/E of 52.20x, higher than its 3Y pre-pandemic mean of 3.16x and 13.54x, respectively. Otherwise, little than its 1Y mean of 7.81x and 56.25x, respectively.

After accounting for a nominal summation successful operating expenses and COGS, we deliberation TSLA whitethorn execute FY2023 EPS of $4.09, if it maintains its existent value cuts and sustains a +10% QoQ summation successful accumulation output.

Based connected this number and nan existent P/E valuations, we are looking astatine a mean value target of $213. While it is somewhat much optimistic than nan consensus value target of $197.50, nan truth remains that location is minimal upside imaginable from existent levels.

TSLA 1Y Stock Price

Trading View

This is unsurprising, since nan TSLA banal has recorded an awesome 103.6% rally to $207.32 since nan January 2023 bottommost of $101.81. And it is for this peculiar logic that we for illustration to workout immoderate caution, since it remains to beryllium seen if nan banal whitethorn prolong nan existent optimism and break retired from nan December 2022 guidance levels.

As discussed above, we whitethorn besides spot immoderate separator compression successful its FQ1'23 performance, contempt nan projected measurement growth. As nan Fed's pivot is improbable to hap earlier 2024, Mr. Market's attraction will apt beryllium connected nan wellness of nan company's financial capacity successful nan short term.

Therefore, we reckon that nan TSLA banal whitethorn moderately retrace complete nan adjacent fewer weeks. Traders whitethorn see taking immoderate gains present and getting successful again astatine nan adjacent dip. Otherwise, semipermanent investors should patiently hold for different charismatic introduction constituent to nibble, apt successful nan $170s for an improved separator of safety.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

I americium a full-time expert willing successful a wide scope of stocks. With my unsocial insights and knowledge, I dream to supply different investors pinch a contrasting position of my portfolio, fixed my peculiar background.Prior to Seeking Alpha, I worked arsenic a professionally trained designer successful a backstage architecture practice, pinch a attraction connected nationalist and healthcare projects. My qualifications include:- Qualified Person pinch nan Board of Architects, Singapore.- Master's successful Architecture from nan National University of Singapore.- Bachelor successful Arts from nan National University of Singapore.If you person immoderate questions, consciousness free to scope retired to maine via a nonstop connection connected Seeking Alpha aliases time off a remark connected 1 of my articles.