If you noticed there was a lack of mumbling, half-sentences and outright bullshit on the Tesla conference call last night, it may have something to do with the fact that CEO Elon Musk didn't make an appearance on the call. It marks the first time in the company's history that Musk was not on the conference call.
Of course, the positive of Musk not being on the call is that whoever is acting as the company's general counsel that week can likely breathe a sign of relief. The negative is that most of the company's cultist supporters, who turn in to hear every last brain fart that Musk is able to conjure up on the fly, may be disappointed.
Or, as Reuters put it, Musk's absence is "likely to turn Tesla's quarterly calls into more staid reviews of business than unpredictable platforms for the celebrity CEO's latest thoughts." Musk follows in the footsteps of executives like Jeff Bezos and Steve Jobs, who would also routinely opt out of their respective companies' conference calls.
Musk had warned over the summer that "unless there's something really important that I need to say," he wouldn't be on the calls going forward. Musk has recently been directing a lot of his focus to SpaceX. The call itself touched on a number of topics.
Speaking about expansion, CFO Zach Kirkhorn said:
Our goal as a Company here is to grow on an average pace of 50% per year. And so, you can extrapolate that out. There may be some periods of time in which we're well ahead of that. There could be some periods of time, despite best efforts, where we're slightly lower than that. But that remains the long-term goal of the Company. In Fremont, we're continuing to push the boundaries of what's possible there. Over the last 12 months, we've done about 430,000 cars of production. And based upon everything that we know in the factory where the bottlenecks are, what the potential is, we’re targeting to increase that another 50%.
Austin and Berlin are interesting factories because our first iterations of capacity there are on Model Y. But we've intentionally set these factories and locations in which they have a quite significant amount of land and ability to expand. And so, we'll take Model Y at these factories. We're trying to get to 5,000 cars a week as soon as we can. And then we'll continue to push beyond that, potentially even getting to 10,000 cars per week at those factories. And then we will add Cybertruck here in Austin and continue to grow from there.
Executives also seemed to take a kinder tone to the NHTSA investigation than CEO Musk may have. Lars Moravy, when asked about the investigation, replied:
As we have been for years, we always engage with NHTSA and other worldwide regulatory bodies to share our knowledge and to work with them on our approaches on both active and passive safety. There are ongoing regulatory inquiries taking place all the time, and especially on the subjects. FSD, they're at the cutting edge of technology development. During these investigations, my team, myself, are always cooperative as much as possible.
We expect and embrace the scrutiny of these products and know that the truth about their performance and the innovations our products have will ultimately be all that matters. In the end then as I've said on previous calls, we take safety as a top priority in all our designs. This is because our primary motivation is from an -- coming from a team of incredible engineers designing software and hardware that saves lives and prevents injuries.
And doing so, we'll continue to be transparent to the public on how our technology is both developing from an autopilot safety data, the latest of which we just shared in the shareholder update. And you can also see in review a wide variety of customer post FSD videos on social media.
They also addressed longer wait times for service across the country and in Europe. CFO Kirkhorn said:
We have seen an increase in service late times throughout the summer, and there's a couple of things that have contributed to that based upon the information that we had. The first is that I think this is not -- this is not unique to us is that the return to some sense of normalcy in a post-pandemic world has happened I think more quickly than most people expected.
And what we're seeing here is that the number of miles that people are driving has increased. There may have been some demand for service during 2020 or in the early parts of 2021 that customers put off. And so, there's a bit of a catch-up that's occurring that has increased demand for service.
At the same time, in the macro-environment here, logistics, moving parts, sourcing parts, has become increasingly more difficult, which is a well-known issue in the world right now, as well as challenges in the labor market. And so, there's this simultaneous increase in demand for service, where the ability to supply that service has been impacted for the reasons I mentioned.
And so, we saw an uptick primarily in Europe and North America and service wait times over the course of the summer. And we've been working extremely hard since then to address this.
Kirkhorn ducked a question about Full Self Driving pricing:
I'll take the second part of the question first, we won't be providing any forward-looking commentary on our pricing strategy or what may happen here over the near term. With respect to the first part of the question, it has been an interesting thing for us to impact within the Company.
He also talked about the coming Tesla insurance product, which will take Tesla's "Safety Score" that it is using to grade FSD beta testers and use it ostensibly to price insurance:
At Tesla, because our cars are connected, because they are essentially computers on wheels, there's enormous amounts of data that we have available to us to be able to assess the attributes of a driver who's operating that car, and whether those attributes correlate with safety. Because we do get a signal when a car has been in an accident. So, we've been spending our time looking at hundreds of different variables and also looking at billions of miles of driving history. And we've been able to fit a model that is able to predict with decent accuracy the probability of collision over a period of time. And the model is not perfect.
The model is a function of the data that we have available. That dataset continues to grow. We continue to experiment with new variables, but we do have a model that works pretty well, so far. And from that model being able to predict frequency of collision, we can then align that against the price curve. And we can have individualized pricing integrated into the car, integrated into the app, integrated into that customer's experience. With the feedback loop back to the customer on how they are driving after every drive, the attributes that they were successful on or unsuccessful on, and the tips of things that they can do to improve their safety.
Kirkhorn also addressed potential costs rising as a result of growing raw material pricing:
Our primary exposure right now is around nickel and aluminum, nickel on the cell, aluminum on non-cell. And we have a mixture of contracts with various suppliers. In some materials, we contract directly and we have full exposure to price fluctuations. We do have a number of long-term commitments and long-term contracts in place. We also have contracts where there's some amount of cost -sharing based upon the movement of indexes. And so, as these have been moving, some of those costs have been flowing through to us. It's unsubstantial amount of cost, but it's not small.
As we look towards the next year, I certainly hope it doesn't play out this way, but it's possible that we continue to see more of cost headwind, as a result of these movements. It's difficult to say precisely, but the volatility in the increases are just substantial. So substantial. And there are certain suppliers that maybe up to a certain point have been absorbing some of the increase.
And finally he praised the company's supply chain team for navigating the chip crisis:
I want to thank our supply chain team for their incredible work and our production teams for showing impressive flexibility as we make adjustments real-time. These teams' expertise in the chip industry across all tiers has made a huge difference in managing through these challenges. Additionally, we never reduced our production forecast with our suppliers as we're adding capacity as quickly as possible.
Analysts also weighed in on Thursday morning with their take on both the report, and the call. Courtesy of Bloomberg, here are their takes:
Cowen (Marketperform, PT to $625 from $580)
Says guidance continues to be “vague,” highlights wide gap between Tesla’s “over 50% delivery growth in ‘22” target and consensus for more than 70% growth
Morgan Stanley (Overweight, PT $900)
Says annualized Ebitda approaching $13b, closing in on levels of GM and Ford, but notes revenue being just a fraction of those traditional automakers
Says lowering dependency on Fremont plan is a further plus for margins
Wedbush (Outperform, PT to $1,100 from $1,000)
“We also believe the scale and scope of Giga Austin will enable Tesla to further expand margins markedly over time and will alleviate the supply bottleneck”
Sees China representing 40%+ of global deliveries for Tesla in 2022
Piper Sandler (Overweight, Street high PT $1,200)
On margins, says 3Q will probably represent “the high-water mark,” at least for the next few quarters
Cites stock underperformance to rally in run up to the results
JPMorgan (Underweight, PT to $250 from $210)
Says investors it chatted with were looking for an update on the ramp of production in Austin and Berlin
Still believes current valuation of over $800b “challenging”
Recall, we published a full report on Tesla's Q3 earnings here.
For the third quarter, Tesla posted:
Revenue $13.76BN, missing the est $13.91B
Adjusted EPS $1.86, beating the est 1.67c
Free Cash Flow $1.328BN, missing the estimate of $1.38BN
Automotive gross margin 30.5%, beating the estimate of 28.4% and up Y/Y from 27.7%
GAAP automotive gross margin 28.8%, beating the estimate of Exp. 26.4%
CapEx $1.828BN, missing the estimate of $1.37BN
Cash and cash equivalents of $16.065BN, missing the estimate $16.88 billion
Tesla said it had its “best-ever” net income, while it actually lowered prices in the third quarter. “Our operating margin reached an all-time high as we continue to reduce cost at a higher rate than declines in ASP,” the company said.
Of note, unlike previous quarter when virtually all the profit came from the sale of regulatory credits, in Q3 the situation normalized somewhat with just $279MM from regulatory credits, a 30% drop Y/Y and a fraction of the GAAP Net Income of $1.618BN.
Amusingly, Tesla announced that in Q3 it suffered a Bitcoin-related impairment of $51M, which however we are confident has been fully reversed by now. Tesla's holdings of “digital assets” totaled $1.26 billion at the end of the quarter. That is down from $1.311 billion in the previous quarter, or $51 million, the amount it reported as a “Bitcoin-related impairment” and which will no appear as a benefit thanks to the surge in the price of bitcoin.
The company also reported what we already knew - that it produced and delivered some 240,000 vehicles, while "reaching an operating margin of 14.6%, exceeding our medium-term guidance of “operating margin in low-teens.” The company proudly noted that "this level of profitability was achieved while ASP decreased by 6% YoY in Q3 due to continued mix shift towards lower-priced vehicles." In Q3, Tesla's operating margin reached an all-time high "as we continue to reduce cost at a higher rate than declines in ASP. "
Looking ahead, Tesla said that it plans to grow its manufacturing capacity as quickly as possible but the growth will be determined by supply chain shortages: "Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries. The rate of growth will depend on our equipment capacity, operational efficiency and the capacity and stability of the supply chain."