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Tesla Fluctuates After Beating Margin, EPS Expectations But Missing On Sales

Courtesy of ZeroHedge View original post here.

Heading into Tesla's Q3 earnings, sentiment is euphoric judging by the near-record stock price and the outlook for is pretty good because despite grappling with the chip shortage, surging input costs and the same shipping bottlenecks plaguing all global automakers right now, Tesla managed to set a record for vehicle deliveries in the third quarter: 241,300 cars.

As a result, Wall Street is expecting a strong report, with consensus expecting an EPS of $1.67 a share on revenue of $13.9 billion.

On the revenue side, expectations for 3Q rose just $131 million after the company topped the consensus delivery estimate by 20,000 units. At an average transaction price near $50,000 (2Q’s revenue per unit), those additional 20,000 units should have increased the revenue estimate by $1 billion. According to the math, the 20,000 units that topped consensus would sell for $6,550 each, he said.

In other words, Bloomberg notes that consensus baked in a sequential revenue advance of $1.956 billion and a $198 million net-income gain, meaning the new revenue gets the same 10% net margin as the first $12 billion -- essentially ignoring fixed-cost absorption. Tesla bear Gordon Johnson of GLJ Research thinks that, based on Tesla’s comments about its ability to generate margin, those incremental units should be contributing to profit at about a 45% clip (it’s a tech company not an automaker, remember?). Even splitting the difference would move the net profit total by about $350 million more than where consensus stands, Bloomberg Intelligence's Tynan said.

“This is another indication that analysts may have set a low profit bar for Tesla to clear and probably have ‘Another Home Run Quarter’ congratulatory notes pre-written,” he said.

This is why a big focus for investors today will be Tesla’s gross margins, excluding sales of EV credits to other automakers. If they improved despite the chip crisis and port logistics headaches, and amid strong demand and pricing, that will be a big positive for Tesla.

To be sure, much if not all of this is already in the price: Tesla’s stock surged about 11% since it announced its 3Q deliveries on Oct. 2. What impressed investors was the fact that they posted record sales when the rest of the industry saw huge drops – especially in September – because of the chip crisis.

Why has Tesla been better at navigating the chip crisis? To be sure, Musk has been very vocal about what a struggle it is – not just chips, but also ships (port logistics) – he said earlier this month. According to Bloomberg, one factor may be that Tesla is big on vertical integration. Musk seeks control of the supply chain by doing as much as he can in-house. In 2019, Tesla dumped Nvidia and started designing its own self-driving chips, and partnered with Samsung to make them in its new home, Austin.

Another advantage Tesla has is that it is still relatively small (for now). While it’s market cap trumps every global automaker, it basically has four vehicle models. General Motors has four brands, and over thirty models--and that’s just looking a their U.S. sales. Then there’s different trims on different models. For automakers, complexity can bring higher profits, but it can also cripple you in a crisis like we are currently going through.

On the bearish side, questions as usual will swirl about the source of Tesla's profitability: as noted last quarter, virtually all of the company's profits in the past year have come from the sale of zero-emission regulatory credits which Tesla sells to other automakers (i.e., Jeep owner Stellantis). It basically equates to 100% margin and has been a significant contributor to net income. But, as Bloomberg notes, it can’t last forever.

For those who need a refresh, this is how much TSLA has sold in regulatory credits:

  • Q1 2020: $354MM
  • Q2 2020: $428MM
  • Q3 2020: $397MM
  • Q4 2020: $401MM
  • Q1 2021: $518MM
  • Q2 2021: $354MM

One thing to look for in today's 530pm conference call is whether Musk will even be present: he previously said he may not longer join, but one controversy may lure him to speak in public: Yesterday, NHTSA (the National Highway and Traffic Safety Administration) said it’s hired Missy Cummings, a professor at UNC who studies automation and has been a very vocal critic of Tesla’s Autopilot feature. She’s joining the regulator as a “Senior Advisor for Safety.”

Musk may also be asked to comment on the company's upcoming headquarters move from California to Austin, Texas.

With that in mind, here is how Tesla did in the third quarter as per the just released investor letter:

  • Revenue $13.76BN, missing the est $13.91B
  • Adjusted EPS $1.86, beating the est 1.67c
  • Free Cash Flow $1.328BN, missing the estimate of $1.38BN
  • Automotive gross margin 30.5%, beating the estimate of 28.4% and up Y/Y from 27.7%

    • GAAP automotive gross margin 28.8%, beating the estimate of Exp. 26.4%
  • CapEx $1.828BN, missing the estimate of $1.37BN
  • Cash and cash equivalents of $16.065BN, missing the estimate $16.88 billion

And visually:

Commenting on the quarter, Tesla said it had its “best-ever” net income, while it actually lowered prices in the third quarter.

“Our operating margin reached an all-time high as we continue to reduce cost at a higher rate than declines in ASP.”

Of note, unlike previous quarter when virtually all the profit came from the sale of regulatory credits, in Q3 the situation normalized somewhat with just $279MM from regulatory credits, a 30% drop Y/Y and a fraction of the GAAP Net Income of $1.618BN.

Amusingly, Tesla announced that in Q3 it suffered a Bitcoin-related impairment of $51M, which however we are confident has been fully reversed by now. Tesla's holdings of “digital assets” totaled $1.26 billion at the end of the quarter. That is down from $1.311 billion in the previous quarter, or $51 million, the amount it reported as a “Bitcoin-related impairment” and which will no appear as a benefit thanks to the surge in the price of bitcoin.

Some other highlights from the quarter, courtesy of Bloomberg:

  • Still Sees 50% Average Annual Growth in Deliveries
  • Continues to Ramp Gigafactory Shanghai
  • Says Gigafactory Texas Progressing as Planned
  • 3Q Free Cash Flow $1.33B, Est. $1.38B
  • Targets Model Y Production in Berlin Before Yr-End

The company also reported what we already knew – that it produced and delivered some 240,000 vehicles, while "reaching an operating margin of 14.6%, exceeding our medium-term guidance of “operating margin in low-teens.” The company proudly noted that "this level of profitability was achieved while ASP decreased by 6% YoY in Q3 due to continued mix shift towards lower-priced vehicles." In Q3, Tesla's operating margin reached an all-time high "as we continue to reduce cost at a higher rate than declines in ASP. "

As a reminder, Tesla sold just shy of 500,000 vehicles in 2020. After Q3, Tony Saconagghi at Bernstein forecast Tesla could sell 900,000 this year, an 80% increase. And depending on how Berlin and Austin do, he sees as much as 1.5 million deliveries in 2022, and 2 million in 2023. But Tesla is also relying heavily on the Model 3 and Y. It needs to get that Cybertruck out the door too — that’s been postponed until the end of 2022 to start production, as Bloomberg notes.

Looking ahead, Tesla said that it plans to grow its manufacturing capacity as quickly as possible but the growth will be determined by supply chain shortages: "Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries. The rate of growth will depend on our equipment capacity, operational efficiency and the capacity and stability of the supply chain."

Tesla continues to target its first Model Y production builds in Berlin and Austin before the end of the year: "the pace of the respective production ramps will be influenced by the successful introduction of many new product and manufacturing technologies in new locations, ongoing supply-chain related challenges and regional permitting."

The company also said that it was "making progress" on the industrialization of Cybertruck, which is currently planned for Austin production subsequent to Model Y."

Regarding China, Tesla had this to say:

For all of Q3, China remained our main export hub. Production has ramped well in China, and we are driving improvements to increase the production rate further.

And another interesting tidbit: for "standard range" vehicles, Tesla is shifting to Lithium Iron Phosphate (LFP) battery chemistry globally. This also means that Plaid mode will not be delivered by lithium phosphate, and Tesla will probably still a high-nickel battery for that.

Another curious fact: Tesla mentioned  the Chinese rolling blackouts as an operational challenge

“A variety of challenges, including semiconductor shortages, congestion at ports and rolling blackouts, have been impacting our ability to keep factories running at full speed. We believe our supply chain, engineering and production teams have been dealing with these global challenges with ingenuity, agility and flexibility that is unparalleled in the automotive industry.”

Elsewhere, Tesla deployed 83 megawatts of solar in the third quarter, slightly down from the 85 megawatts in the prior period. The company remains one of the largest U.S. residential-solar companies, though still far beyond market leader Sunrun.

Tesla says that cash and loan purchases accounted “for nearly all solar deployments.” As Bloomberg notes, SolarCity had popularized the lease model, but Tesla is focused on another product for solar.

As Bloomberg also notes, investors were wondering how the ramp up is going in Berlin and Austin, and Tesla says it’s going just fine: “Gigafactory Texas is progressing as planned.” In Berlin, factory buildout remains on track, and Tesla expects to get its permit by the end of the year.

The company also revealed just north of $16 billion in cash, and FCF in the quarter was up $1.3BN, missing expectations slightly due to a jump in CapEx: "we have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans and other expenses"

Amusingly, Joel Levington, director of credit research at Bloomberg Intelligence, said Tesla may become the first junk-rated company to pass $1 trillion in market capitalization, with its BB ranking at S&P a full six notches below the next lowest trillionaire, Saudi Arabian Oil Co.

However, that may soon change: Tesla's "earnings and cash flow beat in 3Q pushes its credit metrics further into high grade territory, which we expect could be acted upon shortly, based on discussions with raters."

Commenting on the results, Wedbush analyst Dan Ives said that “with the chip shortage a major overhang on the auto space and logistical issues globally, these delivery numbers combined with this ‘impressive earnings beat’ speaks to an EV demand trajectory that looks quite robust for Tesla heading into 4Q and 2022.”

The stock is volatile in kneejerk reaction, trading first higher, then lower, then unchanged and now appears to be drifting down.

What to make of this modest drop? As noted above, Tesla shares had enjoyed a stellar rally over the past four and a half months. Earlier this week, the stock rose more than 55% from the lows touched in early March, and is now trading near its all-time high touched in January. As Bloomberg's Esha Day puts it "all that euphoria and high expectations from earnings had really set the stock up for some potential selloff after results, especially if the numbers were anything less than perfect."


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