Tesla's disappointing Q1 earnings:Is it time to buy or sell?

Why did Tesla's earnings report disappoint the market so much? After an 80% surge since the beginning of the year, will Tesla be able to continue its rebound in the coming quarters?

In fact, Tesla's stock price has been in turmoil since March after a strong rebound at the beginning of the year.

In retrospect, why were people bullish on the rise in Tesla's stock price at the beginning of the year? The main reasons may come from:

1. Tesla's U.S. sales surged at the beginning of the year, driven by a wave of price cuts and a $7,500 federal tax credit; in the Q4 earnings report released in late January, Musk also looked upbeat: I saw the strongest sales volume ever. Car sales are almost twice as fast as production.

2, although Tesla price war, but with its ability to control costs, the company should be more resilient in the global recession. Tesla management comments indicate that its gross margin should remain above 20% in a single quarter.

3. At the Tesla Investor Day on March 1, investors are looking forward to Tesla's plans to release the next generation of affordable new electric cars. Many analysts believe that Tesla currently has only 55% of the U.S. electric car market, and if it can launch an electric car priced at $30,000, Tesla will be able to cover 95% of the market share.

4. Tesla's stock price in 2022 has underperformed, falling nearly 70% from the year's high. After the full release of risk, the investment price ratio has increased.

5.Investors' renewed optimism about the economy and bets that the Fed's aggressive rate hike cycle will end soon make Tesla, a growth stock, one of the hottest stocks in technology this year.

1, At the Tesla Investor Day on March 1,  Tesla did not mention any details of the next generation of new cars, no new news is bad news, after 3 days the stock price fell nearly 10%, Tesla's performance confirmed an old Wall Street saying, buy rumors, sell facts.

2, worries about future prospects, combined with the elusive tax rebates and recession expectations, a number of auto executives at the Bank of America Auto Conference in early April expressed their pessimistic expectations for future electric vehicle sales. Investors suspect that Tesla's strong price cuts are also a sign of weak demand.

3、The market is worried about Tesla's profit margin after the price war.

4, after the rebound at the beginning of the year, Tesla's valuation is already not low, the market is looking forward to Tesla to provide new growth story.

1, investors want to know management's specific evaluation of profit margins for the rest of the year, and many Wall Street analysts believe that auto gross margins will inevitably fall below a key threshold of 20% by the end of the year.

2, the market is concerned about the price of the car after the Kodak activity and demand. As long as management can confirm that "demand continues to outpace supply", the stock price will be effectively boosted.

The market is also watching for updates on the Cybertruck, an electric pickup scheduled to begin production this summer, updates on the third-generation vehicle platform revealed at Tesla's investor day last month, and more information on the timeline for building the latest mega-plant in Mexico.

There is also a lot of interest in management's interpretation of the subsequent pricing strategy, which looks unpredictable, with price reductions and price increases this year.

5. Investors will want to be updated on Tesla's Autopilot program, which has helped improve margins in the past.

Regarding the financial report, the main points are as follows:

Quarterly revenue increased 24% year-over-year to $23.33 billion, in line with Wall Street's general forecast of $23.21 billion. Year-over-year revenue performance by business segment was as follows:

· Revenue from the company's core automotive business reached $19.96 billion in Q1, up 18% year-over-year and down more than 6% sequentially.

On the sales front, Tesla reported record first quarter deliveries of 422,900 units earlier this month, as the market had already expected, due to price reductions and new U.S. tax credits.

· Stored generation revenue surged 148% to $1.53 billion. Growth was driven by a 360% increase in storage system deployments to a record 3.89 gigawatt hours (GWh) and a 40% increase in solar deployments to 67 megawatts (MW).

· Services and other revenue grew 44% to a record $1.84 billion. However, the overall size of services revenue is still relatively small.

GAAP net profit was $2.5 billion, below market expectations of $2.6 billion and down 24% year-over-year. Non-GAAP net income was $2.93 billion, down 22% year-over-year. Adjusted EPS of $0.85, down 21% year-over-year. This was the first year-over-year decline since the third quarter of 2019.

Investors are most concerned about the impact of price cuts on gross margin. 23Q1 gross margin was 19.3%, down both year-over-year and year-over-year, and well below market expectations of 21.2%. In particular, the gross margin of the automotive business was 21.1%, lower than the 25.9% in the fourth quarter and 32.9% in the first quarter of the previous year, the lowest gross margin in the past two years.

Operating profit margin was 11.4%, down from 19.2% in the same period last year. This measure of profitability, which originally ranked Tesla among the top in the auto industry, reached 16.8% last year, nearly three times that of traditional car companies.

Tesla said that "underutilization of new factories" depressed margins, along with higher raw material, commodity, logistics and warranty costs, lower average selling prices for vehicles, higher production costs for 4680 batteries, and lower revenue from sales of carbon credits to traditional automakers, all contributed to the decline in profitability compared to the same period last year.

Cash generated from operations decreased 37% year-over-year to $2.5 billion in the quarter. Free cash flow declined 80% to $441 million. Financial blog Zerohedge found that Tesla's overall gross margin fell below the 20% threshold for the first time since the collapse of the epidemic, not counting carbon credits from sales of $521 million, and free cash flow will also be negative in the first quarter.

In short, Tesla's Q1 results were in line with expectations. Although operating margins and overall gross margins were weaker than expected, and free cash flow dropped 80% to $400 million, both of which could depress the stock price.

During the subsequent conference call, Tesla als responded to the main concerns of the market:

Tesla wants to downplay concerns about its recent price cuts, arguing that operating margins are declining at a manageable rate. Musk said that the pursuit of sales volume is Tesla's current core strategy, Tesla can sacrifice its leading industry margins to drive sales volume growth during the recession and gain a head start in the fierce competition.

At the same time, with the emergence of economies of scale and the downward cost of raw materials, the company expects bicycle costs to continue to decline. On the one hand, it is expected that the price of upstream raw materials such as lithium will fall in the second half of 2023, which is expected to reduce operating costs. On the other hand, with the increasing production of automobiles, the economies of scale will help reduce bicycle manufacturing costs. At the same time, the increase in production efficiency of new factories, lower logistics costs and the construction of new vehicle manufacturing platforms will also effectively drive down costs.

Tesla still expects global production of 1.8 million units in 2023, with long-term delivery growth remaining at 50 percent. Musk said on Wednesday that "orders exceeded production" after the latest round of car price cuts.

Tesla says production of the Cybertruck is expected to begin later this year at Giga Austin, where the company will produce an "Alpha" or early test version of the vehicle. The company will produce an "Alpha" or early test version of the vehicle. However, it did not mention the latest information on the third-generation vehicle platform, and the "next-generation model" is still just a pie in the sky.

Tesla will likely roll out full Autopilot technology this year and generate significant profits to offset some of the margin pressure it is facing due to significant price cuts. Musk remains very positive about the "Full Autopilot" feature, despite the (repeated) delays in its Autopilot development. Musk believes the value of Autopilot will ultimately be "very significant," and that the improvements in the FSD Beta are "pretty obvious" and "I think we'll get it done this year.

"We do have that unique strategic advantage," Musk said. "If Autopilot is successful, that asset will be worth much more in the future than Yijia."

Overall, after a full recovery of expectations at the beginning of the year, Tesla's latest earnings report may lack a new growth story in the absence of an explosive new car to pull it along.

Short-term: In order to ensure the growth of sales volume, Tesla is expected to adopt a price reduction strategy, so the company's profit margin may be further reduced and short-term results will be under pressure.

Medium-term: In the medium term, the decline in raw material costs and bicycle manufacturing costs are expected to lower the company's costs, while the software subscription service and energy storage and power generation business still have more room for imagination.

Long-term: Tesla can leverage its cost advantage and is expected to be ahead of its competitors in the price reduction strategy.

However, Tesla's current overall valuation level is much higher than similar established companies, with a price-to-earnings (TTM) ratio of 49.89x. Given the pressure on short-term profits and the current margin of safety, investors may need more time to accompany Tesla's growth.