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Tesla just announced record sales. Is it all rosy ahead for Tesla's stock?
Summary: Tesla's stock is up +159% in 2023 and it just announced record sales this quarter. Is it all rosy ahead for Tesla's stock? We should look deeper into the numbers.
Tesla's stock popped up another +7% after announcing another record sales in Q2 2023 on Friday. 2 insights:
1️. Aggressive price cuts are a big catalyst behind the record sales figures, but it doesn't mean this will translate into higher profits.
In 2023 alone Tesla has cut its cars' prices by 6 times already. The purpose behind slashing prices is to retain dominance in an increasingly crowded Electric Vehicle (EV) market. But cutting prices ultimately comes with a cost. We will know the true picture on July 19th when Tesla announces it Q2 earnings results.
In the meantime 2 things also matters:
1) While Tesla has been cutting prices the key ingredient to manufacture their batteries called lithium carbonate has increased 34% over the past 3 months.
This will negatively impact their bottom line.
2) Tesla's unsold inventory is still a concern.
When we look deeper into the figures Tesla still produced 91,000 more cars than it sold in Q2.
Although this figure is shrinking versus prior quarters, the buildup in unsold cars equates to about US$4.2 billion in value (assume US$38K per car). So, there are reasons to not just blindly celebrate on Tesla's success.
2️. How should Tesla's current valuation be read?
Tesla has its work cut out for it based on what the expectations based into the stock price. For example, with the expected revenue of US$99.9 billion in 2023, for Tesla that would translate into an aggressive +17.1% annualized revenue growth rate over the next 10 years. But no car manufacture has ever remotely reached these numbers.
Taking a comparison from another growth industry was in 2011, Apple hit US$108 billion in revenue and the subsequent 10-year revenue growth rate was 12.9% annualized. But this growth rate was obtained by Apple with lower priced consumer hardware and selling digital goods. Apple was operating in an industry with little meaningful competition at the time.
So this may not be a great comparison for Tesla but still highlights that the road ahead may be challenging for Tesla to meet these elevated expectations. Clearly Tesla has other trump cards up its sleeve like potentially becoming the standard for charging stations amongst US EVs.
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