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Tesla Is Well Positioned to Navigate an Economic Storm
Tesla's December quarter earnings was all about the company's 2023 outlook after the recent price cut threw a wrench into how investors should think about the trade-off between deliveries and profitability. The essence of the guidance calls for 50% delivery growth this year, ahead of the Street's 37% target and gross margin ex credits of above 20%, compared to the concern of many investors that they would dip into the high teens. The bottom line: The company appears to have made the right decisions to successfully navigate what will likely be a difficult year for the auto industry.

Key Takeaways

If Tesla meets the internal delivery target for 2023, they'll increase delivery growth from 40% in 2022 to 50% in 2023.
Expect 2023 gross margins to be above 20% ex credits, higher than the feared 16-19%.
The Cybertruck is on track to start deliveries later this year along with hints of new models.

Focus on Musk's guidance

Formal guidance calls for 1.8m deliveries which implies delivery growth will decrease to 37% y/y in 2023 from 40% in 2022. That said, on the conference call, Musk threw the formal guide out the window when he revealed the company’s internal target is closer to 2.0m deliveries this year. If Tesla meets the internal delivery target for 2023, delivery growth will increase from 40% in 2022 to 50% in 2023. My sense is the year will end closer to 2.0m deliveries given the adrenaline rush that orders recently got with price cuts. To that point, Musk commented that orders are currently outpacing production by 2x. While that pace won’t remain throughout the year, it sets the first half up for 60% y/y growth and the back half closer to 40%.


Margins will go down, but not get crushed

The central profitability metric, auto gross margins ex credits, came in below expectations at 24.3% vs. the Street at 26.8% for December. While below expectations, these margins still outpace the broader auto industry which is in the mid teens. If you’re curious, gross margin ex credits and ex FSD was 23.1% which speaks to the positive impact that FSD can have on Tesla’s margins long-term.

Going into the earnings call, I was bracing for the outlook on margins. In September of 2022, Tesla reported gross margin ex credits of 27%. Following the price cut, I was expecting guidance to fall between 15-20% for 2023. CFO Zach Kirkhorn guided gross margin ex credits to be above 20% for 2023. Given the company’s commentary to expect average selling price to decline by 7% this year, I see the 20% plus margin outlook as realistic. Previously, I had expected a 10% decline in average selling prices which would have pushed margins lower. In the end, it appears that some of the customers that were attracted to the flagship 20% Model Y price cut are upgrading to higher trims. Additionally, Kirkhorn commented that the uptick in volume is yielding cost economies of scale.


Cybertruck and other models are in the works

Included in the company’s formal outlook was commentary to anticipate Cybertruck production to begin later this year, inline with previous commentary.  Additionally, Tesla reiterated that we will hear more detail on the next-generation vehicle platform, which is currently under development, at the company’s March 1 Investor Day. That platform, commonly referred to by industry followers as robotaxi or Model A, likely won’t be in production until 2025. Even though that’s a long way out, the company appears to be positioning itself to ride Cybertruck’s ramp in 2024 and the Model A ramp in 2026, giving hope to investors that the delivery growth party will only continue.


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