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Analysis | Musk’s big Tesla growth target is a problem


It pays to dissect the language of a company’s earnings report, but perhaps even more so for Tesla Inc. You could say it’s in the company’s genes. After all, Chief Executive Elon Musk has spent much of the past few days trying to convince a jury that he really had “funding” in 2018. the way of documented advance approvals than your average household mortgage application.

The line that caught my attention Wednesday night was about guidance, with Tesla aiming to produce 1.8 million vehicles this year, thereby “staying ahead of the 50% long-term CAGR,” or compound annual growth rate. Tesla has said for a few years that it aims to grow annual production by half on average over a “multi-year horizon”. Compare that target for 2023 to production of just over half a million in 2020 and you do indeed get a compound growth rate of more than 50%. But the actual growth this year appears to be 31%

Let’s admit that this is still phenomenal for any decent sized automaker. Just five years ago, Tesla produced only about 250,000 vehicles.

But the narrator here is the language, with Tesla going all out to emphasize that it will technically stay true to the “multi-year” target despite sharply slowing growth. Certainly, it has slowed more than expected: the consensus forecast for 2023 is 1.95 million. That explains why Tesla probably felt the need for a growth-insured moment.

The disappointing fourth quarter deliveries and price cuts that have unnerved investors over the past month carried through into Wednesday’s results. Inventory rose and implied average sales prices, excluding lease cars and legal credits, fell below $52,000, their lowest in a year. Even that figure was boosted by about $800 via the recognition of $324 million in deferred revenue tied to Tesla’s generously named Full Self Driving package. Gross profit per vehicle sold was the lowest in nearly two years at about $12,300. Free cash flow fell by a third year-over-year, well behind projections.

That is not surprising, but it is worrying. Unsurprisingly, companies chasing growth often run into the problem of needing to increase capacity faster than revenue. Tesla produced 1.37 million vehicles last year, but has a capacity of more than 1.9 million, with new and expanded factories expected in markets from Mexico to Indonesia.

It’s troubling because, despite the collapse of Tesla’s stock over the past year or so, it still trades at a 77% premium to the S&P 500 based on multiples of future earnings estimates — estimates that look fragile after these results . Tesla remains priced for growth, but the growth story comes with the caveat of using average multi-year rates and a clear reliance on price cuts. The latter are especially detrimental to Tesla’s image, because price cuts to move products are what you get from regular old car companies trading at single-digit profit multiples (Tesla’s is 32 times).

Even worse, mainstream old car companies haven’t slashed prices lately, despite lower deliveries. This is due in part to the pandemic-related disruption to supply chains, leaving dealer lots scarce and providing the industry with a relatively rare dose of pricing power. People like Ford Motor Co. have adopted this to better align production with sales (see this). That’s basically the opposite of what happened to Tesla as it chases growth.

During Wednesday night’s Q&A, Musk praised Tesla’s AI capabilities. Viewing Tesla as more than a car company has long been an effective way to boost its valuation, albeit less so of late. The challenge for Tesla this year is not to deliver robotaxis or a walking robot. It will be related to weak demand amid a potential recession that Musk seems to view as anything but certain. For investors who have just gone through a year of falling expectations, it will be another dose.

More from Bloomberg’s opinion:

• Tesla’s skid leaves old car with a new dilemma: Liam Denning

• A giant car market is short of EV buyers: Anjani Trivedi

• ‘Battery Belt’ in the US becomes a new kind of track magnet: Conor Sen

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist on energy and resources. A former investment banker, he was an editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’ Lex column.

More stories like this are available at bloomberg.com/opinion

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