Trading On margin

Are Tesla’s margins under threat?

Tesla’s (NASDAQ:TSLA) financial performance has been nothing short of outstanding over the past two quarters. Notably, the company’s gross margins for its automotive business, excluding its sales of regulatory credits, increased from around 22% in the first quarter of 2021 to 30% in 2022, an increase of around 800 basis points. This is a strong number in the context of the broader automotive industry, which sees average gross margins of around 14%, and also given the current inflationary environment and bottlenecks in supply chain affecting the automotive sector. Tesla’s operating margins for the first quarter of 2022 were also 19%, about 3 times the auto industry average.

Two factors are driving Tesla’s margin gains at this point. First, Tesla is achieving better economies of scale, as deliveries are up more than 60% from Q1 2021. The company’s high-volume Model Y and 3 vehicles share a common platform and use largely similar parts, which probably leads to a drop in production. costs as they evolve. Tight demand and supply constraints mean it’s a seller’s market in the automotive sector, and Tesla, like most other automakers, has prioritized producing more expensive versions. of its vehicles compared to the basic models. Tesla has also been insulated from the material price spike to some extent due to its long-term contracts and vertical integration. Tesla’s growing proficiency in manufacturing and cost management is also becoming more apparent, as its margins rise despite industry headwinds as the company optimizes manufacturing and proves adept at replacing shortages of semiconductor components. .

Today, despite strong recent progress, Tesla stock has corrected more than 35% year-to-date. However, we believe the stock remains a good value at its current market price of around $760 per share, trading at around 60 times forward earnings. While not exactly a low multiple, it is justified by Tesla’s rapid growth and strong execution. For perspective, the company has guided shipment growth of more than 50% over a multi-year period while indicating that it could approach 60% growth this year. Tesla’s advantage in the electric vehicle market, strong brand recall and growing production capacity should help its long-term growth. We have a valuation of $1,100 per share, which is about 40% above the current market price.

That said, there are also risks. The US economy as a whole appears to be slowing, with first quarter GDP declining year over year. Interest rates have also risen, which could also impact demand for cars and electric vehicles, potentially slowing growth. Moreover, competition in the electric vehicle space is also intensifying, with traditional automakers doubling down on their electric vehicle plans with massive development budgets and investments in production capacity. These developments risk undermining Tesla’s pricing power and, therefore, pose a risk to its margins. It’s also likely that Tesla could eventually feel the impact of soaring commodity spot prices as its longer-term contracts expire, given the scale of its needs.

See our analysis on Tesla Valuation: Are TSLA shares expensive or cheap? for more details on Tesla’s valuation and how it compares to its peers. For more information on Tesla’s business model and revenue trends, check out our dashboard at Tesla Revenue: How TSLA Makes Money.

What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since the end of 2016.

Return May 2022
MTD [1]
YTD [1]
Total [2]
Back to TSLA -13% -28% 1677%
S&P 500 return 1% -13% 86%
Trefis Multi-Strategy Portfolio 1% -16% 228%

[1] Cumulative monthly and cumulative annual as of 05/30/2022
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.