Hope everyone had a nice weekend!
Tesla Earnings Call- Street Pessimism Continues
“We have seen very murky times from Tesla and [Elon] Musk over the last year with last night’s quarter and conference call leading the Street with minimal answers and lots of questions and frustration yet again as this margin/price cut battle continues with a shaky and hopefully trough margin 2024 year ahead. We were dead wrong expecting [Elon] Musk and team to step up like adults in the room on the call and give a strategic and financial overview of the ongoing price cuts, margin structure, and fluctuating demand…instead we got a high level Tesla long-term view with another train wreck conference call.”
-Daniel Ives, Wedbush Securities Managing Director and Senior Equity Research Analyst
Tesla’s post-earnings analysis always generates significant chatter around its valuation, growth goals, and performance but this quarter in particular marked a notable shift in Street sentiment after yet another disappointing quarter. The brutal post-earnings takedown of Tesla by Wedbush’s Dan Ives was the most scalding with a mix of frustration, anger, and disappointment all rolled up into his analyst report. Most notably, of the much celebrated “Magnificent 7”, Tesla has seen significant relative underperformance so far in 2024, in a trend that looks ready to continue after its recent poor results and earnings call.
Let’s breakdown some key recent developments:
Margin & Operating Earnings Inflection Remains Elusive
While, automotive gross margins ex-credits improved quarter over quarter in 4Q23 to 17.2%, up from 16.3% in 3Q23, consensus is now that Tesla’s margin improvements above 20% will likely need to wait until the next-generation EV platform ramps up (codenamed “Project Redwood”), which will likely be in late 2025. However, automotive gross margins are still well below the peak at around 29% in mid-2022, largely a result of Tesla’s deep price cuts on its vehicles. In addition, Tesla noted on its earnings call that due to sustained profitability, it released a $5.9B deferred tax allowance and starting with Q1 2024, Tesla’s book tax rate will now be more in line with other companies in the S&P 500 or around 20-25%, up from ~10%, which will add pressure to net income. As shown below, the benefit from the deferred tax asset release comprised almost 73% of the net income this past quarter as operating profit plummeted 53% YoY to $2B.
Growth Targets Now In Question
Tesla Q4 revenues increased 3.5% YoY, its slowest growth rate since Q2 2020, and demand concerns continue to stack up. Tesla’s earnings release stated “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”. Street consensus estimates for Tesla’s full year 2024 revenue growth shows revenue will likely slow to 10% from 19% in 2023. In addition, demand concerns continue to stack up such as with rental car agreements with Herz. Hertz, the largest U.S. fleet operator of EVs, announced in early January that it would offload 20,000 used Tesla EV’s, roughly one-third of its global fleet, and reinvest a portion of the proceeds in internal combustion engine (ICE) vehicles due to low demand, high insurance and repair costs. The earnings call discussion also pointed to intense Chinese automaker competition as a significant demand risk with a tacit acknowledgement that, without trade barriers, Chinese EV’s will dominate other carmakers, including Tesla. Elon Musk stated “…our observation is generally that the Chinese car companies are the most competitive car companies in the world. So I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established. Frankly, I think if there are not trade barriers established, they will pretty much demolish most other car companies in the world.” This also comes at a time when European markets such as France and Germany scale back on EV credits due to fiscal budget concerns, among others. Specifically, France changed its EV tax credit rules beginning in 2024 that foreign manufactured EV’s, such as Tesla’s Model 3 which is manufactured in China, is no longer eligible for cash tax incentive of between 5,000 and 7,000 euros. In addition, more and more press continues to come up that EV hesitancy is growing due to high cost of ownership, insurance, and range/charging anxiety, among other factors. A recent survey from Consumer Reports covering owner responses on more than 330,000 vehicles, showed that EVs from the past three years had 79% more problems than conventional ICE cars. For many EV owners, many are also finding out that there is no way to repair or assess even slightly damaged battery packs after accidents, which forces insurance companies to write off the cars as a total loss with a even with just a few miles; leading to higher premiums and undercutting benefits from switching to an EV. Meanwhile, slowing growth is not just a Tesla specific issue as market research firm Canalys expects overall EV sales growth in North America to slow to about 27% this year from a scorching 72% rise in 2023.
Payoff of Investments in New Revenue Streams Questioned by Wall St.
Elon Musk discussed on the earnings call that he wanted to “change the perception of Tesla as people thinking of Tesla as a car company when they should be thinking of Tesla as an AI robotics company” as investments in AI computing (Dojo), full-self driving (FSD), and robotics (Optimus) were discussed as potential new growth segments. Meanwhile this comes after Elon recently stated and reiterated again on the earnings call that he “he is uncomfortable expanding AI and robotics at Tesla if he doesn't have 25% of voting shares”. Elon’s commentary has left many analysts attempting to sort out what this exactly means for Tesla’s future and struggling to model when and what type of growth and earnings profile these areas could see in future. Even fervent Tesla analyst and supporter Gene Munster of Deepwater Asset Management acknowledges that despite Musk’s statements that Optimus robots could ship later next year, based on Elon’s track record with other projects, this would imply the year 2030 at the earliest.
Takeaways
-Pessimism is running very high at the moment as investors pile on to Tesla’s recent string of poor earnings results and increasing demand concerns. Tesla shares being down over 25% in the past 4 weeks, significantly underperforming the S&P 500, further feeds the negative news narrative around the company.
-Return on investment for Tesla’s investments in various growth projects such as humanoid robots, AI, full self-driving, are being met with significant Street analyst scrutiny and skepticism. Elon’s dissatisfaction with his current voting shares percentage, and veiled threats to pause further work unless he gets it, further clouds the picture for Tesla.
-While it’s easy to pile on Tesla’s EV business at the moment, there have been notable Tesla successes of late including its energy storage business growing gross margins from 2023 Q1 of +11% to 2023 Q3 of +24.4% and total energy storage deployments reaching 14.7 GWh in 2023, a whopping 125% increase compared to 2022.
-Tesla is not unfamiliar with growth challenges and Wall St. scrutiny and so this could just be another speedbump in its growth profile. In the meantime while Tesla ramps up its next generation vehicle platform, it will be important for Tesla to at least show stabilization in its growth and margin profile to continue warranting its premium valuation. Otherwise, expect the parade of analyst downgrades to continue.
Quotes of the Week
1) “Our portfolio consists of over 230 companies, more than 12,000 real estate assets and one of the largest credit businesses in the world. We marshal real time data across these holdings to develop macro insights that we then share across all of our businesses, allowing the firm to adapt quickly to changing conditions….We now believe CPI is running below the Fed's 2% target after adjusting the reported numbers for shelter costs, which lag what we've observed on the ground as one of the largest investors in this area…..In our own portfolio, our companies are showing strong top line performance overall as well as earnings growth as cost pressures have eased. We see a resilient economy, albeit one that is decelerating. What we're seeing is consistent with a soft landing….We believe we're now heading into a better environment, as Steve noted, with inflation and cost of capital headwinds moderating.
This backdrop is leading to the emergence of three powerful dynamics across our business. First, we believe that real estate values are bottoming. Second, our momentum in the private wealth channel is building. And third, investment activity has picked up meaningfully across the firm, which is a key element of creating future value….we believe values in commercial real estate are bottoming. This doesn't mean there won't be more troubled real estate investments to come in the market, particularly in the office sector, which were set up during a period when borrowing costs were much lower. Nor does it mean we won't see a slowing in fundamentals in certain sectors with excess near term supply. What it does mean is that the cost of capital appears to have peaked as borrowing spreads have begun to tighten and the Fed is no longer raising rates, but likely cutting them in 2024. Also, importantly, new construction starts have started to move down sharply in commercial real estate, which is quite positive for long term values. While it will take time, we can see the pillars of a real estate recovery coming into place.”
-Stephen Schwarzman (CEO) & Jonathan Gray (COO), Blackstone Inc. (BX)
2) “We don't have a crystal ball, so it's difficult for us to predict [automotive gross margin ex-regulatory credits for the full year] this with precision. If the interest rates come down quickly, I think margins will be good. And if they don't come down quickly, they won't be that good. Yeah. It's always important to remember that the vast majority of people buying a car is about the monthly payment. It's not that people don't want [them]. We have tons of -- we have lots of people who want to buy our car but simply cannot afford it. And as interest rates drop and that monthly payment drops, then they're able to afford it and they buy the car. It's pretty straightforward and there are no tricks around to get around this.”
-Elon Musk, CEO Tesla, Inc. (TSLA)
3) “The uncertainty remains in the market due to a number of global macro concerns, while the semiconductor industry is currently working through the bottom of the cycle. Our customers are still not certain on the shape or slope of the recovery this year but there are some positive signs in the indicators that we have been monitoring. Industry end market inventory levels continue to improve, moving towards more healthy levels. Lithography 2 utilization levels are still running lower than normal but are now improving in both logic and memory. We expect utilization levels to continue to improve over the course of this year….Looking longer term, while there are still significant uncertainties, primarily driven by the macro environment, it appears we are passing through the bottom of this specific cycle and expect an industry recovery over the course of 2024. Based on discussions with our customers and supported by our strong backlog, we currently expect 2025 to be a strong year driven by a number of factors….the secular growth drivers in the semiconductor end markets which we have previously discussed, such as energy transition electrification and AI. The expanding applications, along with increasing lithography on future technology nodes, drives demand for both advanced and mature nodes. Second, the industry expects to be in the middle of a cyclical upturn in 2025. And last, as mentioned earlier, we need to prepare for a significant number of new fabs that are being built across the globe in some instances clearly supported by several government incentive plans. These steps are spread geographically, are strategic for our customers and are scheduled to take our tools.”
-Peter Wennink, CEO ASML Holding N.V. (ASML)
4) “In Vanguard's view, crypto is more of a speculation than an investment. This is at the root of our decision to not offer crypto products, whether our own or others. With equities, you own a share of a company that produces goods or services, and many also pay dividends. With bonds, you get a stream of interest payments. Commodities are real assets that meet consumption needs, have inflation-hedging properties, and can play a role in certain portfolios. While crypto has been classified as a commodity, it's an immature asset class that has little history, no inherent economic value, no cash flow, and can create havoc within a portfolio. Morningstar recently published a perceptive article pointing out that even a modest 5% allocation to bitcoin in an otherwise traditional balanced portfolio can drastically raise its risk profile. This is driven, in large part, by bitcoin's extreme volatility.”
-Janel Jackson, Vanguard Global Head of ETF Capital Markets and Broker & Index Relations
Some interesting charts from this past week:
1) Estimates Going In Different Directions- Big Tech Expected to Carry Heavy Load into 2024
2024 earnings estimates are going in different directions so far as 2024 EPS estimates for small-caps have been cut ~20% while S&P 500 estimates have remained steady. In addition, Big Cap Tech is expected to carry a significant load ahead. In particular, according to FactSet estimates, the estimated blended earnings growth rate for the entire S&P 500 for Q1 2024 is 4.6%. However, there is significant reliance on Big Cap Technology to carry the load as four companies, namely NVIDIA (NVDA), Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOGL) in the aggregate are projected to report year-over-year earnings growth of 79.7% for Q1 2024 and are responsible for whopping 54% of total S&P 500 earnings growth. Excluding these four companies, the remaining 496 companies in the S&P 500 are projected to report year-over-year earnings growth of just 0.3% for Q1 2024.
2) Fiscal Alarm Bells Going Off- Interest Expense Revving Up
The Federal Reserve’s interest rate cycle hiking cycle has triggered a sharp increase in US debt servicing costs, revealing the strain of previous debt expansion in a once low-interest rate landscape. Specifically, the average interest rate paid by the U.S. Treasury on debt has now doubled since 2022 to 3.113% and rising. Annualized interest on the federal debt now exceeds $1 trillion and is projected to breach $3 trillion, annualized rate, by Q4 2030. This coming week, all eyes will be on U.S. Treasury Secretary Janet Yellen and Treasury funding plans as the Treasury Department has so far largely offset the Federal Reserve’s quantitative tightening by increasing the share of total issuance of bills far beyond the norm.
3) Non-Farm Payrolls Growth Since January 2020
While monthly non-farm payroll reports are interesting to track, another more relevant comparative to track is which states have fully recovered from their COVID-19 pandemic era job losses to discern true net job “growth”. Last week, Alaska joined 39 other states and Puerto Rico in seeing its payroll levels fully recover. The fastest growers have been ID (+11.5%), UT (+9.9%), NV (+9.8%), TX (+8.9%), & FL (+8.9%) while the largest decliners have been VI (-10.8%), HI (-4.7%), VT (-3.3%), DC (-3.1%), & RI (-1.4%).
Stocks I’m Watching
Honorable mentions that didn’t make the final cut: GD, ASML, APP, DSP, XP, NU, MELI, FLEX, BAH, DKS, URI, RMBS, VNOM, WIRE, QUIK, BLDR, CAT, ARCH, VTEX, AME, HAFNF, DDS, METC, ALVO, GTLB, ARCO, PKG, CPRT, TASK, MTG, MITSY, INDA, BXC, ACLS, NVMI, AJG, VECO, BRK/B, ARCB, DSP, TWST, INOD, TWLO, TFII, IBN, SNOW, ARCB, VMC, EU, BECN, BLBD, AB, RDNT, ORLY, AZO, MTG, CALF, BRO, ODFL, MNDY, SNOW, IPAR, CSX, IPAR, PG, OSCR, SNOW, SAP, NVMI, STEP.TO, ASO, COF, NUE, CXW, MU, AMP, PSTG, EGLE, SLM, AME, EQIX, PKG, IP, ULTA, OTEX, EVR, PAA, AXP, COF, AVY, ALY, CEEP, PVH, CX, H,PINS, BTU, WSC, FLR, GATX, SCX, XLF, AMP, POST, FIS, TEL, CHIE
1) Textron (TXT)
Textron Inc. operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation, and Finance.
Textron had a weekly base breakout on above average volume last week after it reported impressive margin expansion and the company's Bell helicopter group showed a re-acceleration of growth due to strong commercial and military demand. The company’s Bell helicopter unit had revenues increase by 30% from a year earlier to $1.1 billion in the fourth quarter on higher commercial sales and $84 million related to the U.S. Army’s Future Long-Range Assault Aircraft program. In addition, backlog in Textron’s aviation unit grew by $782 million, or about 12%, in 2023. Goldman Sachs has been quite bullish on Textron adding it to the Goldman Sachs Conviction List Directors’ Cut for January 2024. FY24 estimates call for 23% EPS growth with a forward P/E of 13X.
2) Embraer Aircraft (ERJ)
Embraer S.A. designs, develops, manufactures, and sells aircraft and systems in North America, Latin America, the Asia Pacific, Brazil, Europe, and internationally.
Earnings reports from General Dynamics and Textron last week provided strong indicators that the business jet market is alive and well which is also supported by the 2023 Honeywell Global Business Aviation Outlook (released October 2023) which forecasted that new business jet deliveries in 2024 are expected to be 10% higher than in 2023. Embraer also continues to rack up strong new orders with a $2.1B order from Porter Airlines for 25 E195-E2 passenger jets and a contract to supply South Korea’s military with cargo planes. EPS growth estimates are 111% and 52% in FY24 and FY25, respectively, with free cash flow surging 52% YoY in 2024 with a forward P/E of 12X and $18B backlog. From a technical perspective, Embraer is sitting just below weekly breakout resistance and saw strong volume pour in after its last quarter’s earnings blowout (Revenue rose 38% to $1.28 billion with sales of commercial jets surging 68% to $424.9 million). Earnings expected 3/15.
3) Scorpio Tankers (STNG)
Scorpio Tankers Inc., together with its subsidiaries, engages in the seaborne transportation of refined petroleum products in the shipping markets worldwide. STNG is the world’s largest owner of clean product tankers.
Scorpio Tankers has seen surging skyscraper volume pour in the past 3 past weeks as Wall St. analysts scramble to update earnings estimates with shipping day rates continuing to skyrocket due to Red Sea shipping attacks and re-routing disruptions. LR2 spot earnings on the benchmark TC1 (AG/JP) route surpassed TCE $100k/d this week to reach the second highest level on record, only eclipsed by the OPEC+ price war in 2020 and Scorpio’s fleet of 39 LR2 vessels all are trading on spot pricing. Expectations are for Scorpio to continue to melt away its net debt of $1.3 billion, increase dividends, buybacks, or some combination this upcoming quarter. The longer shipping rates stay elevated, the more earnings revisions likely will result moving forward. From a technical perspective, Scorpio recently had a weekly base breakout and pullbacks to rising 10WK moving average could offer opportunity. Next key resistance level is not until $100 level. Evercore upgraded Scorpio Tankers just last week to an “Outperform” rating with an $89 PT. Earnings expected 2/14.
Disclaimer:
All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.