Tesla 3Q23 Earnings Review: Earnings Fall Below Consensus Expectations

Tesla (TSLA) reports 3Q23 earnings on October 18. J.P. Morgan released the earnings review on OCT 19.

Stock Rating：Underweight

Price (18 Oct 23): $242.68

Price Target (Dec-24): $135.00

Tesla reported 3Q23 earnings that fell far below consensus expectations, including with regard to revenue (-4% miss vs. Bloomberg consensus), automotive adjusted gross margin (-170 bps miss vs. consensus), automotive adjusted gross profit dollars (-15% miss), EBIT dollars (-21% miss), EBIT margin (-160 bps miss), EPS (-10% miss), and — most of all — FCF (-69%). Revenue in 3Q came in at $23,535 mn, essentially in line with JPMe at $23,474 mn but a miss vs. consensus at $24,605 mn

While unit volume growth this year has disappointed earlier analyst and investor expectations, it is nevertheless still impressive on a standalone basis, equating to strong +38% growth (i.e., ~1.8 mn units this year vs. ~1.3 mn last year). However, it starts to look less impressive when measured in revenue terms, given the decline in revenue per vehicle, which interestingly comes at a time when other automakers are generating higher revenue per vehicle.

While GM and Ford sport $41 bn and $47 bn market caps and 4x and 7x NTM P/E ratios, respectively, Tesla sports a $770 bn cap and 64x ratio. Tesla’s 7.5% EBIT margin in 3Q is no longer standout relative to Ford’s 2Q EBIT margin of 8.4% and GM 7.2%, adding to the risks J.P. Morgan sees for valuation.

Free Cash Flow: Free cash flow tracked significantly less than expected again in 3Q and amounts to a paltry yield on its lofty market capitalization. Tesla’s 3Q free cash generation was just $848 mn vs. JPMe $2,204 mn and Bloomberg consensus for $2,766 mn. This is the third straight quarter featuring a substantial FCF miss.

3Q Details and Estimate Changes: Revenue tracked $23,535 mn, roughly in line with JPMe $23,474 but modestly below Bloomberg consensus for $24,605 mn. Automotive gross margin excluding the sale of regulatory credits came in at 16.3%, a significant miss vs. both consensus for 18.0% and JPMe 17.7% (compares to 26.8% a year ago). EBIT in the quarter also missed estimates on both dollar and margin terms, tracking $1,764 mn (7.5% margin) vs. JPMe $2,057 mn (8.8%) and consensus $2,235 mn (9.1%). Flowing through the softer -$293 mn in 3Q EBIT vs. J.P. Morgan's forecast (which benefitted from +$279 mn more regulatory credits than J.P. Morgan had modeled, impairing quality of earnings, as well an additional +$37 mn of Other Income including FX gains which J.P. Morgan hadn’t modeled), J.P. Morgan now forecasts 2023 EPS of $3.27 vs. $3.43 prior, 2024 EPS of $3.90 vs. $4.05 prior, and 2025 EPS of $4.50 (unchanged). J.P. Morgan continues to see material downside to J.P. Morgan's unchanged fundamentals-based December 2024 price target of $135 (which still values Tesla as the world’s most valuable automaker).

J.P. Morgan's Underweight rating considers notable investment positives, including a highly differentiated business model, appealing product portfolio, and leading-edge technology, which J.P. Morgan believes are more than offset by above-average execution risk and valuation that seems to be pricing a lot. Tesla is attractively saddled with none of the pension, OPEB, and other legacy costs that frequently burden large entrenched automakers.

Its products are bold, distinctive, elegant, and highly entertaining to drive. The company is led by visionary leadership, backed by a management team with solid functional strength. Although both technology and execution risk seem substantially less than was once feared, expansion into higher volume segments with lower price points seems fraught with greater risk relative to demand, execution, and competition. Meanwhile, valuation appears to be pricing upside related to expansion into mass-market segments well beyond J.P. Morgan's volume forecasts for Model 3 and Model Y.