FSD is out, who still says Tesla is "paper tiger"?

Tesla (TSLA.O) released its first-quarter report for 2024 after the U.S. stock market closed on the morning of April 24th Beijing time. Despite the fading of optimistic narratives, waves of pessimism have hit Tesla one after another, continuously pushing the stock price to new lows. However, in reality, Tesla did not suffer any significant tragedies:

1. Surprisingly, Tesla's per-vehicle revenue remained stable in the first quarter: the quarter-over-quarter value of per-vehicle revenue from car sales (excluding regulatory credits and car rentals) dropped by $35. Despite price reductions in China and Europe and no improvement in the vehicle mix, Tesla managed to maintain its per-vehicle price.

2. "Impressive" per-vehicle gross margin: The so-called impressiveness mainly lies in the absence of the market's expected collapse. The comprehensive gross margin for cars, excluding credits, only decreased by less than one percentage point, reaching 16.4%, which significantly exceeded the market's expectation of 13-14%.

3. Per-vehicle costs passed with some carelessness: The fixed costs per vehicle were indeed poor due to weak sales volume, Cybertruck, and planned and unplanned production stoppages at various locations. However, there was a certain decrease in variable costs per vehicle, which offset the increase in depreciation costs.

4. The real mystery: Therefore, the unexpectedly strong per-vehicle economics is mainly attributed to the stability of per-vehicle revenue. But why did per-vehicle revenue remain stable? Based on the company's explanation, it is likely that the Full Self-Driving (FSD) feature played a key role in surpassing the market's pessimistic expectations (detailed explanation in the original text).

5. Pay attention! Updates on Model 2 guidance: The key information is that the launch may be advanced, the price may not necessarily be low, and the sales volume may not necessarily be high. Before the existing production capacity of 3 million units per year is fully utilized, the introduction of new production lines may be put on hold. Overall, this is very positive for the financials. The market's previous expectation that Model 2 was doomed was overly pessimistic (detailed explanation in the original text).

6. Increased investment: Capital investment in a single quarter reached nearly $2.8 billion, hitting a new high. Investment in autonomous driving did not weaken at all, and research and development investment in a single quarter also reached nearly $1.2 billion. Despite sluggish sales demand, sales and administrative expenses also hit a new high, but marketing investment did not yield returns, so it is normal for sales to be a major area for layoffs.

7. Operating profit of $1.1 billion, profit margin excluding the impact of the pandemic at a five-year low: High expenses, coupled with negative revenue growth, further lowered the operating leverage, while the gross margin remained strong.

Dolphin's overall view:

In the second half of last year, Dolphin has systematically analyzed the issues that Tesla will face in 2024 through three articles: "FSD Smart Driving: Unable to Support Tesla's Next Valuation Miracle", "The Lion King Meets the Wolf Pack, Can Tesla 'Watch Over Home'?", and "Tesla: How Far is Musk's 'Trillion-Dollar Empire Dream'?".

The recent stock price has thoroughly interpreted these issues:

1) The slowdown in sales and large-scale layoffs indicate not only the slowing of sales after the penetration rate of new energy has reached a turning point, but also a further extension of the market, suggesting a weakening of the attitude of governments in Europe and the United States towards new energy.

2) Product cycle: The small product cycle in 2024 has further evolved into no product cycle in 2025 and 2026, as the story of Model 2 has become obscure.

3) Diminishing AI halo: This is mainly due to Musk's active disassociation, expressing doubts about whether Tesla has control over the development of AI within the company.

4) Betting on Robotaxi and going all in on autonomous driving—a highly uncertain business model due to policies and regulations in various regions, which increases the uncertainty of both short-term and long-term investments.

In summary, for investors currently holding Tesla stock, the valuation of Tesla is still based on the company's automotive hardware business. Without this solid foundation, other aspects are essentially "of little consequence".

However, the actual first-quarter deliveries show that the FSD V12 has brought in high-margin FSD revenue, stabilizing Tesla's gross margin. This is a clear positive for investors who recognize Tesla's autonomous driving business.

As for the Model 2, the company's outlook does indeed downplay its importance, but strategically, the use of existing vehicle platforms and existing production capacity to launch low-cost models ahead of schedule, as well as the implicit reduction in investment in low-cost vehicles, is also positive news for investors currently focused on the automotive business itself, compared to the previous absolute pessimistic expectations.

The fact is that for a company like Tesla, which relies heavily on future realization and has highly fluctuating expectations, both excessively pessimistic and excessively optimistic views are equally dangerous.

Below is a detailed analysis of the financial report:

01 Tesla: Entering the Twilight Years?

"Receives" first negative growth in five years

In the first quarter of 2024, Tesla's revenue was $21.3 billion, a nearly 9% year-on-year decline. This is the first time since 2020 (when the Shanghai factory began selling cars and the Model 3 began to sell well) that Tesla's revenue has experienced negative growth.

In terms of expectations, the $21.3 billion in total revenue performance seems significantly lower than the sell-side consensus expectation of $23.3 billion on Bloomberg, but in reality, this expectation was already outdated when the sales volume was announced. The most recent updated consensus among major banks is around $21 billion, so there was no significant deviation in revenue expectations.

In fact, compared to the excessively pessimistic expectations, the actual performance in the first quarter was not as bad as expected: in terms of the automotive business, the sales volume of 387,000 units in the first quarter was already clear. The key to the final revenue and gross profit of the automotive business lies in the unit price of the vehicles.

In terms of the crucial unit price, although Tesla has significantly reduced prices in China and other regions, the main market in the United States has seen slight price increases. As a result, the first-quarter unit price did not decrease as expected, so the automotive business seems to have experienced a 13% year-on-year decline in revenue to $16.9 billion, the first decline in five years, but in reality, this revenue was slightly higher than expected.

In addition, the two minor businesses, where revenue is only a small part, saw a 25% year-on-year growth in services, which is operating normally, but the energy business saw a slowdown in year-on-year growth to single digits, resulting in overall revenue that is basically in line with market expectations, despite the automotive business not performing as poorly as expected.

The gross profit margin held up instead.

Each time the performance, more important than revenue, and the real incremental information in the financial report has always been the performance of the automobile gross profit margin. Fortunately, on this issue, this time Tesla not only did not meet the market's expectations, but also performed much better.

Due to the significant month-on-month decline in the average selling price of cars in the first quarter, the gross profit margin of the energy business almost reached 25%, and the gross profit margin of the service business improved after expanding the coverage of non-Tesla users for supercharging stations in North America starting in February.

The overall gross profit margin of the group held up instead, with a gross profit margin of 17.4% in the first quarter, only 0.2 percentage points lower than the previous quarter, despite the delivery of the low-margin product Cybertruck.

However, on the cost side, due to the continuous investment in research and development by Tesla in areas such as autonomous driving, DOJO supercomputing, robotics, and new vehicle platforms, and due to the poor sales volume of cars, the marketing efforts have increased. The combined research and development expenses and marketing/management expenses, in the case of a 9% negative growth in revenue, increased by nearly 40% year-on-year, and the operating leverage is very poor.

The final operating profit was only $1.1 billion, a year-on-year drop of nearly 60%. The operating profit margin was also only 5.3%, significantly lower than the market's expected 7.4%.

The biggest surprise: the bicycle economy has actually held up!

As the most important observation indicator for each quarter, the automobile gross profit margin is important to the point of being crucial, especially in the current situation of declining sales and intensifying competition. In order to clearly see the true situation of the automobile gross profit margin, Dolphin has separately extracted the automobile sales gross profit margin excluding carbon credits, the automobile leasing gross profit margin, and the overall automobile business gross profit margin.

Due to the small volume of the automobile leasing business and the stable gross profit margin, and the overall gross profit margin of the automobile business is a comprehensive consideration of the two, such a detailed breakdown is mainly for observing the gross profit margin of automobile sales excluding carbon credits.

The gross profit margin of automobile sales (excluding carbon credits) in the first quarter was 15.6%, compared to 16.6% in the previous quarter, a decrease of just over one percentage point, but clearly not the severe decline of 13-14% expected by the market.

Therefore, the key decryption here is how Tesla has maintained the unit price and gross margin of the car in the case of frequent price reductions and a declining proportion of X/S/Cyberbruck sales, how did they achieve this kind of unit economics?

02 Unit Economics: Is the magic in FSD?

In the first quarter, Tesla's revenue per car sold (excluding carbon credits and car leasing sales) was $43,500, only a $35 decrease compared to the previous quarter, which is almost negligible. And this almost negligible decrease is one of the key market expectations.

The original market expectation was that in the first quarter, Tesla in China would have a big sale with price reductions ranging from 2-6% (with an average reduction of around 10,000 RMB for Model 3 and Model Y). In addition, the price reductions in the European region were also generally between 4% and 8%. Of course, after the price reductions, there were some minor price increases, but they did not affect the overall trend of price reductions.

The main hedge is in the United States: there was a slight increase in prices in the US region (an increase of $1,000 for Model 3/Model Y). However, since China and Europe together account for more than 50% of sales, it is unlikely that the significant price reductions in these two markets can be offset by the small price increases in the US region.

However, strangely, the price of Tesla's vehicles in the first quarter ended up staying steady at around 43,500 RMB, with almost no change. The only explanation that Dolphin could find for this issue, and also the favorite story of AI faith funds, is that the income from FSD has increased!

Tesla did not specify how much FSD income was confirmed in the first quarter, but emphasized that due to the release of FSD V12 (supervised version), the income related to FSD in the first quarter has increased significantly. Note that this type of software income is recorded in the sales revenue of automobiles, so when this type of software income increases, it will indirectly increase the unit revenue and gross profit margin of automobiles.

After talking about the firm price of the sturdy bicycle, let's talk about the bicycle cost. Generally speaking, Tesla's cost reduction comes from four dimensions: 1) dilution of scale from sales volume release and full utilization of production capacity; 2) technological cost reduction; 3) natural cost reduction of battery raw materials; 4) government subsidies.

However, the first-quarter sales were sluggish this year, and all Model 3 IRA subsidies in the U.S. were canceled. At the same time, the Cybertruck's uphill drag on gross margin, planned production stoppages at the U.S. factory due to the old model replacement, and the unexpected production stoppage at the German factory due to the arson incident, as well as the impact of the supply chain disruption, all dragged down the gross margin. The only thing that could support the gross margin, apart from high-margin businesses like FSD, was the natural cost reduction of materials. However, Tesla's performance in this quarter on this issue was exceptionally outstanding.

The extent of this excellence even made the author doubt whether the new Model 3/Y should have had a certain gross margin premium on the initial guidance price, rather than the company's claim that the new product pricing simply covered the additional costs of product improvement.

Reducing prices to boost sales, the bicycle economy cannot sustain

The author breaks down the bicycle cost into bicycle depreciation and bicycle variable costs. The first-quarter bicycle economic account is as follows:

1) Bicycle depreciation effect is very poor: due to factors such as declining sales, the U.S. factory's new model climbing, the Cybertruck's launch leading to production line depreciation, and the production stoppage at the German factory due to arson, the first-quarter per-bicycle depreciation cost was $3,220. The last time the per-bicycle depreciation continued to be above $3,000, the quarterly sales were between 200,000 and 300,000. Each vehicle was depreciated by an additional $678 compared to the previous quarter, which is indeed not low.

2) Bicycle variable costs: The bicycle variable cost in the first quarter was $33,500, a decrease of $253 compared to the previous quarter, mainly due to the reduction in raw material costs, lower freight prices, and tariff improvements.

3) The gross profit margin of the car has dropped again: ultimately, due to the stabilization of the unit price, the actual gross profit per unit has only decreased by $460. The real highlight of the quarter for the unit economics is the stabilization of the unit price, which is the unexpected joy from FSD.

2.2 Unit price and sales volume pressure led to a decline in car sales revenue: In the first quarter, the total revenue of the overall car business (including points) was $17.4 billion, a year-on-year decrease of 13%, and the well-known sales volume decline is the main reason.

The regulatory points included in this quarter amounted to 442 million, showing a relatively stable performance. Currently, the impact of carbon credits on Tesla's current revenue and profit has diminished significantly.

If the sales and gross margin outlook for Tesla cars in 2024 is not optimistic, what else can Tesla focus on in 2024?

The gross margin for the first quarter of Tesla is indeed very good compared to the market expectations, but the current over-performance of the gross margin is mainly due to the FSD. What really needs attention is the sustainability and explosiveness of FSD revenue.

In the first quarter, Tesla has already launched FSD (supervision version), offering a 30-day free trial to some users in North America and Canada. Moreover, with both the company's efforts, the price of FSD in North America has just been reduced from $12,000 to $8,000, and the price in Canada has been reduced from $16,000 to $11,000, showing a very aggressive price reduction, indicating a determined effort to rapidly increase the penetration rate of FSD. (For a detailed analysis of Tesla's intelligent driving by Dolphin, please click here)

According to the company's latest disclosure, Tesla's cumulative autonomous driving mileage in the first quarter of 2023 increased non-linearly due to the launch of the FSD Beta version, and then entered a normal growth rate. In April 2024, after Tesla started offering a 30-day free trial, the mileage surged again.

The next investment in Tesla, the real focus should be on the penetration rate after the price reduction of the new version of FSD+, and the subscription rate of users. In this year, which is a small year for car sales, this is the core of where the valuation space of Tesla is.

Because the car business is in a period of stagnation, and the next significant increase in profit expectations from Model 2 is expected to be discounted, and the short-term landing speed of Robotaxi is difficult to say due to regulatory and technical issues. The remaining investment can only look at the upward support brought by the logic of the penetration rate improvement after the price reduction of FSD V12.

Whether Model 2 is canceled or delayed may require special attention to any possible information and guidance given by the company in the conference call. Dolphin will release the minutes in the Changqiao APP, please pay attention.

The questions everyone is concerned about: Is there still a Model 2? When will it come?

In the first quarter, the gross profit margin was cleared, but if it is indeed only the one-time update of FSD that brings income confirmation, and the uncertainty of the final penetration rate of FSD V12, it means that the certainty of Tesla's car gross profit margin still remains uncertain.

The question still needs to be returned to 2024 and beyond, where is Tesla's growth? Where is the bottom line and steady state of the gross profit margin? These are the questions that the market hopes to see answered in the first quarter of the new year. Especially, does Model 2 still exist? When will it come? Has the planned sales volume changed?

Fortunately, Tesla has clearly answered this question this time, because it is too important, and Dolphin has restored it word by word:

a. "Tesla is currently in a period of switching momentum between two major growth cycles (AKA: stagnation)—the first round is the global large product cycle initiated by 3/Y, and we believe the second round will come from the advancement of autonomous driving and the launch of new products, including the models to be launched on our next-generation car platform."

Dolphin's understanding: In this description of the major cycle, Tesla's description of the next major growth is autonomous driving, and then the new models under the cheap platform. Compared to the previous communication Dolphin saw, the order has changed, and the focus has changed—Tesla's judgment of the importance of Model 2 is decreasing.

b. "We have updated the future car product line, and the new models will be produced faster than previously communicated, starting production in the second half of 2025."

Dolphin's understanding: Absolutely significant good news, because the market competition is changing, and Tesla's 7-8 year cycle of product updates is too slow compared to Chinese new energy vehicle peers!

c. "These new models, including cheaper versions, will use our next car platform, as well as our current platform, and will be manufactured on the production lines of existing models. This update may lead to a reduction in the expected cost reduction, but it can allow us to cautiously increase sales growth with higher capital utilization efficiency during uncertain periods. This can also allow us to maximize the current production capacity of nearly 3 million before investing in new production lines, ensuring a growth of over 50% compared to 2023."

Dolphin's understanding: This is the biggest strategic adjustment. The original Model 2 was a product under the new platform, and now the old platform will also produce cheap cars. This is very likely to indicate that either Model 2 will not be so cheap in the end, or in addition to Model 2, there will be some products coming out with prices between Model 2 and 3, and it is very likely that it will no longer be a stubborn technical cost reduction, but selective de-contenting? Because this is a major product strategy shift, Dolphin dare not speculate, and still needs to see Tesla's detailed explanation.

In terms of production planning, the pace of investment in new factories in Mexico and even India has become highly uncertain, and the investment in new factories is likely to be significantly slowed down, instead focusing on maximizing the production capacity of existing factories such as the Shanghai and German factories.

In this case, the sales expectations for Model 2 are inevitably greatly reduced. However, based on the current market valuation (around $130 per share), there is basically no valuation for Model 2. The cautious approach at present—cautiously slowing down capital expenditure on car production—equivalent to giving a certain sales expectation for Model 2, and this sales volume is expected to come earlier, and stabilizing capital expenditure to a certain extent also stabilizes the future gross profit margin expectations. This guidance is a clear positive.

Looking at it this way, indeed there are still many problems in front of Tesla, such as:

1) Uncontrollable prices: A new round of price reductions was launched in the global market in April: the price reduction in China is basically 3-6%, although there is a small price increase in the United States, the subsidy for Model Y may be reduced from $7500 to $3750, and there is a large inventory backlog. The price of Tesla in the United States has been reduced by 2-4%; the market demand is weak, and the market has no hope for Tesla's sales in 2024, and the lowered expectations basically consider that apart from the increase of about 125,000 Cybertrucks, there is almost zero growth in other areas in 2024.

2) Accumulated Inventory: Tesla's inventory has accumulated significantly in the first quarter. Observing the cumulative value of the production-sales difference of Tesla (as Tesla operates directly, the production-sales difference is the inventory of Tesla plus the in-transit vehicles that have been shipped but have not yet reached the users). The inventory, including in-transit vehicles, had accumulated to 153,000 vehicles by the end of the first quarter, accounting for 35% of the first-quarter production. The inventory turnover days for the quarter were 28 days, almost double the previous 15 days.

However, the two positive signals released in this financial report will inevitably lead to a significant upward revision of market expectations:

a. The increase in FSD penetration rate may significantly boost the gross profit margin of the automotive business; subsequent focus will be on the progress of the actual paid penetration rate of FSD after the free trial period.

b. Regarding the automotive business, affordable cars may arrive early, requiring advance revenue injection; the prices may not necessarily be too low, and existing production capacity will be fully utilized, with no need for a too low gross profit margin expectation; the sales outlook needs to be adjusted downward.

In the end, under intense market competition, Tesla ultimately made trade-offs between market share and gross profit margin of its vehicles. In the short term, Tesla will no longer engage in the strategy of producing and selling as much as possible, and the gross profit margin bottom line for 2025 should be able to stabilize.

Overall, the signals released in this financial report are much better compared to the dire market consensus.

03 Expenditure: All in for Autonomous Driving

Tesla has become more cautious in its investment in automotive production capacity, but it remains generous in its capital investment in autonomous driving. Capital expenditures in the first quarter have reached nearly $2.8 billion, and research and development investment has reached $1.15 billion, both reaching new highs, with capital expenditures being particularly exaggerated.

Sales and administrative expenses have increased significantly despite product stagnation, and the absolute values have increased. More staff has led to poor sales volume, and the performance of marketing expenses is worse than that of research and development. This situation naturally brings to mind Tesla's global layoffs, with sales being the hardest-hit area in this round of layoffs.

In the end, due to weak income and high expenses, Tesla's operating profit was only $1.1 billion, with an operating profit margin of 5.3%, hitting a five-year low without considering the disruption of the epidemic.

Energy slows down, service imagination continues

4.1 Energy slowdown: Tesla's energy storage and photovoltaic business includes selling photovoltaic systems and energy storage systems to residential and small and medium-sized commercial customers, as well as large commercial and utility-level customers.

In the first quarter of this year, revenue reached $1.6 billion, with growth slowing to single digits at 7%, significantly lower than market expectations. The photovoltaic rooftop business has fallen into negative growth, and Tesla has stopped disclosing installation volumes due to high interest rates and a narrowing gap between oil and electricity prices, leading to declining installation demand.

However, the energy storage business continues, with an installation volume growth of 4%. The energy storage business involves locking in prices with advance orders, and due to the current strong relationship with lithium ore prices, the declining lithium ore prices have actually driven the energy business gross margin to a new high of nearly 25%.

Nevertheless, despite the stable and high gross margin, the revenue volume is too small, and the growth rate is not high enough to make up for the significant losses in the automotive business.

In the first quarter, Tesla achieved a service revenue of $2.3 billion, a year-on-year increase of 25%. Charging piles, insurance, and other imaginative businesses are all included in this sector. However, at present, the largest contribution to the revenue of this business still comes from selling car parts and used cars.

Fortunately, starting in February of the first quarter, Tesla's North American region began to open up the charging pile business to more third-party non-Tesla users. The imaginative business not only began to contribute to revenue, but also gradually improved the gross profit margin of this sector, with the gross profit margin in the first quarter increasing to 3.5% compared to the previous quarter.