Tesla Q1 23 – Normalisation.

A promise that will never come true.

• The promise of fantastically profitable robotaxis will never come true meaning that lower margins as Tesla falls into line with the rest of the industry are probably here to stay.
• Hence, the valuation remains orders of magnitude higher than it should be.
• Tesla reported reasonable results with Q1 2023 revenues / Adj-EPS of $23.2bn / $0.85 which was broadly in line with expectations.
• The key figure here is operating margins which fell to 11.4% in Q1 2023 from 16.0% in Q4 2022 and is telling us exactly what is going on.
• Tesla is still the leader in EVs but the other OEMs are catching up and this is forcing Tesla to cut prices in order to stay ahead.
• In my opinion, part of the problem is the low-quality interiors when compared to German EVs being sold at the same price point.
• Furthermore, Teslas are not known for their build quality and so Tesla needs to either up its game in terms of quality or cut its prices.
• Musk appears to be going for the latter with the promise that Tesla will earn much higher margins when its vehicles are capable of moonlighting as robotaxis.
• I have a lot of respect for Mr Musk as he generally does keep his promises even if they are many years late, but this one is non-sensical.
• Musk thinks that he is going to have millions of robotaxis running around for which he can charge $1 a mile for a ride which will cost him $0.30 per mile to provide.
• The current cost of ride-hailing is about $2 per mile and so it is not hard to see how this is an attractive proposition based on today’s conditions.
• However, in order to hold onto that price, he needs to be the only one offering the service which means Tesla has to be the only company with a working autonomous driving solution.
• The problem here is that all of the indicators available clearly point to Tesla not being a leader in the autonomous driving industry.
• In fact, for years, I have classified it as an also-ran and I still see nothing to change this view,
• This means that others are going to get there first, meaning that there will be plenty of offerings available by the time Tesla finally gets it working properly.
• Robotaxi is going to be a business if brutal, cutthroat competition meaning that with multiple players, the price is not going to be $1 per mile but something closer to $0.40.
• This means that Mr Musk’s contention that Tesla will earn 70% gross margins on its robotaxi business is a fantasy and even now this is still needed to support the valuation of the shares.
• Tesla has been a narrative-driven stock where no one cared about the fundamentals but eventually, the narrative always runs out of road.
• This time may have finally arrived as the automotive industry is closing the gap and Tesla is feeling the pressure which has forced it cut prices which I think is going to continue.
• Its fantastical robotaxi strategy is very unlikely to deliver the results expected, meaning that Tesla is steadily becoming just another OEM.
• To be fair, its digital strategy is far superior to everyone else’s and this means that it is in a good position when the market for digital services in the vehicle finally begins to materialize.
• However, this time is far off and so I am waiting for the valuation to normalize compared to the industry before I look at the impact of digital services.
• There is plenty more downside to be had.