The electric vehicle maker had $1.4 billion in free cash flow at the end of Q4, which is down from the $3.3 billion the company had in the bank at the end of the third quarter.
Tesla’s stock saw a 3.2% spike to $149 per share immediately after earnings dropped and continued to rise to $151.52 in after-hours trading.
The effect of price cuts on margins
Investors today were on the lookout for gross margins after Tesla slashed prices and offered multiple discounts on its vehicles. While Tesla as a whole closed the quarter with a 16% operating margin, automotive gross margins came in at 25.9%, which is the lowest figure in the last five quarters.
Margins in the first quarter of 2023 might look worse, says Eric Schiffer, the CEO of private equity firm Patriarch Organization.
“The outlook will still depend on the recent moves of Q1, which suggest some compression in demand,” Schiffer told TechCrunch, referring to January’s price cuts.
Tesla acknowledged that short-term automotive margins will be impacted by the decrease in prices and the general inflationary environment, but the company’s management is more focused on its operating margin.
“As other areas of the business become more important, and particularly the energy business which is growing faster than the vehicle business, we’re heavily focused on operating leverage here and improving the efficiency of our overheads,” said Zachary Kirkhorn, Tesla’s chief financial officer, during Wednesday’s earnings call.
CEO Elon Musk wanted to put concerns around demand to bed during the call, saying that after the company brought down prices, January saw the strongest demand ever in Tesla’s history. In fact, he said, demand exceeds production.
Earlier this month, Tesla reported vehicle deliveries of 405,278 in the fourth quarter. While those were record deliveries, the automaker still missed Wall Street estimates for the third quarter in a row. Similarly, Tesla’s 1.3 million vehicle deliveries in 2022 was also a record for the automaker, but that number misses Tesla’s own guidance of achieving 50% growth YoY and getting to 1.4 million deliveries.
Regardless, Tesla still intends to grow production as quickly as possible “in alignment with the 50% CAGR target we began guiding to in early 2021,” and reach 1.8 million cars in 2023. During Wednesday’s earnings call, Musk said Tesla has the potential to reach 2 million cars this year but is being cautious given market uncertainty.
Prioritizing “affordability”
The company acknowledged that average sales prices have “generally been on a downward trajectory for many years,” and that Tesla aims to prioritize “affordability” so that it can grow into a company that sells multiple millions of cars annually.
“Price really matters,” said Musk. “The vast number of people that want to buy a Tesla car, can’t afford it. And so these price changes really make a difference for the average consumer.”
Musk went on to say that Tesla is working on cost control measures like factory efficiencies, which will manifest this year in the ramp of production at the new gigafactories in Berlin and Austin, better control of the supply chain and even design changes, specifically to the powertrain.
Tesla also announced earlier this week plans to invest an additional $3.6 billion into its Nevada gigafactory to build a battery cell facility and a Semi truck factory. In terms of battery cells, the company’s long-term goal is to get “well in excess of 1000 gigawatt hours of cells produced internally,” said Musk, noting that the company would also rely on third-party battery cell producers like Panasonic to keep costs down and efficiency up. Musk also nodded to Tesla’s plan to make a 4680 cell that will have low-cost and high-energy density.
The EV tax incentives for vehicles produced in the U.S. and with battery components sourced from U.S. or free trade agreement countries might also help Tesla bring its prices down, said Kirkhorn.
“We also want to use these incentives to improve affordability as we think about what the price points are on our products going forward,” said Kirkhorn.
Bringing costs of the vehicles down will also be a necessity for the automaker as it, along with everyone else, faces macroeconomic pressures, a looming recession and increasing competition from other automakers.
“Tesla is not immune [to] the recession, and I still expect to see more recession-driven market pain,” said Schiffer.
Autonomy, electrification and energy solutions
Tesla said it remains focused on “autonomy, electrification and energy solutions.” The company’s energy storage arm finished out 2022 with the “highest level” of deployments ever. Energy storage deployments increased 152% from Q4 in 2021 to 2.5 GWh, for a total 2022 deployment of 6.5 GWh. Tesla said demand for its storage products “remains in excess of [its] ability to supply.” The company said it is ramping up production at its 40 GWh Megapack factory in Lathrop, California, to address demand.
Tesla’s solar deployments also increased 18% YoY in Q4 to 100 MW, with a total 348 MW of solar deployed in 2022.
When it comes to Full Self-Driving (FSD), Tesla’s advanced driver assistance system, Tesla said it had sold its beta version of the software to roughly 400,000 customers, bringing in revenue recognition of $324 million as part of the company’s automotive sales.
On Elon tweeting
