Should You Invest in Tesla Stock After Its Earnings Debacle?
Electric vehicle (EV) manufacturer and “Magnificent Seven” member Tesla (TSLA -2.24%) reported Q4 and full-year 2023 earnings last week. Unfortunately for shareholders, the call didn’t go so well.
Tesla CEO Elon Musk left investors shocked with some uninspiring commentary around the company’s artificial intelligence (AI) projects. Moreover, growth in the core EV business is decelerating and Tesla’s margins and cash flow are deteriorating.
With the stock down more than 10% since the earnings report, some investors may be wondering if now is an opportunity to buy the dip. Let’s review the state of all things Tesla, and take a hard look at the company’s financial and operating metrics. More importantly, after digesting Q4’s earnings debacle, it’ll be important to assess if the long-term picture is still intact.
Tesla’s growth is slowing…
For the full year 2023, Tesla generated $96.8 billion in total revenue, up 19% year over year. EV revenue was up 15% annually, while the company’s solar energy revenue grew by 54%. While 15% growth is respectable, keep in mind that in 2022 Tesla’s EV segment increased by an eye-popping 51% year over year.
The table below illustrates Tesla’s total revenue, gross margin, and free cash flow profiles over the last several years.
| Category | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| Total Revenue | $24.6 billion | $31.5 billion | $53.8 billion | $81.5 billion | $96.8 billion |
| Gross Margin % | 16.6% | 21% | 25.3% | 25.6% | 18.2% |
| Free Cash Flow | $1.1 billion | $2.8 billion | $5.0 billion | $7.6 billion | $4.4 billion |
Data Source: Tesla Investor Relations
One of the biggest reasons why Tesla’s EV business decelerated so dramatically is because the company employed aggressive price cuts in an effort to combat rising competition. In addition to a precipitous slowdown in sales, this tactic had another pernicious consequence — deteriorating margins. As a result, Tesla’s free cash flow is at its lowest point since 2020.
The financial trends above may not exactly convey a lot of confidence from investors and analysts. However, it’s important to keep in mind that companies in many different industries have witnessed stunted growth over the last year, as the macroeconomic picture was largely cloudy. My suspicion is that some comments made by management during the call are what ultimately spooked investors the most.
Image Source: Getty Images
…but that’s not the only problem
Although Tesla is best known for its electric cars, the company has garnered a lot of interest for its artificial intelligence (AI) pursuits. Specifically, Tesla is hailed as a leader in autonomous driving thanks to its ground-breaking software development. The company’s self-driving technology operates under the moniker Dojo. This is Tesla’s homegrown supercomputer that processes data like traffic patterns and road imagery directly from its EVs.
Furthermore, Tesla has also spent considerable time and capital developing a humanoid robot called Optimus. These robots are meant to have many purposes including working in warehouses and helping people with everyday mundane tasks. The shift these robotics could have on the labor industry is unprecedented.
Both Dojo and Optimus have been viewed by many as potential billion-dollar businesses that could propel Tesla beyond just a car company. In fact, back in October Musk declared that success in AI could make Tesla the most valuable company in the world.
But just last week Musk referred to Dojo as a “long shot” on the earnings call. Subsequently, when pressed about the timing of Optimus, Musk hinted that the first units might be shipped by next year.
Given Musk’s history of missing product deadlines, it’s quite possible that the promised delivery of Optimus bots next year didn’t carry much credence. Moreover, the pessimistic outlook on Dojo’s likelihood of success undoubtedly caused some investors to sour.
Should you invest in Tesla stock?
At the end of the day, many Tesla investors have clearly bought into the growth story beyond EVs. As such, the stock has experienced a lot of volatility throughout its history, and the company’s valuation has soared. In fact, Tesla’s market cap is higher than that of many other leading car manufacturers combined.
To me, the biggest issue with Tesla is not its valuation. It’s the lack of clarity during earnings calls — most of which lack specifics around the long-term roadmap, leaving investors to decipher vague generalities.
Perhaps the most valuable nugget on the call was in relation to the company’s future growth prospects. Gene Munster, of Deepwater Asset Management, did his best to de-code management’s comments by posting the following:
Correction: TSLA shares are down because the outlook was surprisingly soft.
Tesla suggests “In 2024, our vehicle volume growth rate may be notably lower than the growth rate achieved in 2023, as our teams work on the launch of the next-generation vehicle at Gigafactory Texas.”…
— Gene Munster (@munster_gene) January 24, 2024
I personally agree with Munster’s assessment. As a shareholder, I am not holding my breath this year for Tesla. My expectations are low, and candidly, I’m thinking beyond 2024. My biggest word of caution is that if Tesla continues to treat earnings calls as more informal updates, more investors could lose confidence in management and the stock could fall a lot further.
For now, the most prudent thing to do may be to keep an eye on the stock and use sound judgement when scooping up additional shares. Moreover, tuning into the company’s earnings calls may be more important than ever as Tesla attempts to make it to the next stage of growth and maturity.
