Tesla’s top and bottom line miss and Musk’s mixed messages on demand send shares into reverse (TSLA)

For the first time since 2Q19, Tesla (TSLA) fell short of analysts’ earnings and revenue expectations in 3Q22, feeding into concerns that demand is wavering under escalating macroeconomic pressures. TSLA’s eccentric CEO, Elon Musk, sent mixed messages about the demand environment during the earnings conference call, stating that he expects an “epic end of the year” and that the company will sell every car it produces in Q4.

However, Musk acknowledged that “demand is a little harder than it would otherwise be” as the Federal Reserve raises interest rates more than it should, in his opinion. He also said that Europe and China are experiencing different types of recessions, with the former getting hit hard by soaring energy prices, and the latter dealing with plunging property prices.

TSLA’s actual results and outlook, though, don’t depict a company that’s struggling to find customers.

  • While TSLA did slightly miss Q3 estimates, revenue grew by a robust 56% yr/yr to $21.45 bln, marking a new quarterly sales record. Meanwhile, operating margin expanded by more than 260 bps yr/yr to 17.2%, despite the rising costs associated with the ramp up of TSLA’s Berlin, Germany and Austin, TX plants. The strong top-line growth, coupled with the margin expansion, drove a 75% yr/yr increase in non-GAAP net income to $3.65 bln.
  • Each of TSLA’s factories produced a record number of vehicles in Q3. Since the end of Q2, Berlin has doubled its weekly output to 2,000 from 1,000 vehicles with the Austin factory not far behind. Automotive gross margin still decreased by nearly 260 bps yr/yr to 27.9%, but the metric was flat on a sequential basis. Considering that the prior quarter’s ASP benefitted from lower production at Shanghai (due to COVID lockdowns), the flat qtr/qtr performance looks pretty solid.
  • TSLA maintained its outlook of achieving 50% average annual growth in vehicle deliveries over a multi-year horizon, although CFO Zachary Kirkhorn cautioned that deliveries this year may not meet that growth target. According to Kirkhorn, the issue isn’t demand related — rather, it’s due to transportation and logistics constraints.
    • Recall that when TSLA reported Q3 production and delivery results on October 3, there was a large discrepancy between production (365K) and deliveries (343K). This difference was caused by challenges in loading huge batches of vehicles onto ships and trains during a timeframe of just a few days. For some context, roughly one-third of Q3 deliveries occurred in the final two weeks of September, with many of those vehicles still in transit when TSLA issued its production and delivery report.
    • This issue is expected to play out again in Q4, creating another gap between production and deliveries. TSLA is working to remedy this situation by smoothing out regional builds throughout the quarter, which should reduce its peak needs for outbound logistics.

Overall, it was a solid quarter for TSLA, but the stock’s rich valuation with a forward P/E of ~37x leaves little room for error, especially since the company’s demand picture is under such intense scrutiny. Musk tried to ease those valuation concerns last night by predicting that TSLA will someday be worth more than Apple (AAPL) and Saudi Aramco combined. Based on today’s stock action, it’s clear that investors are taking that declaration with a huge grain of salt.

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