Tesla's Q4 Profits Plunge by 40%

U.S. stocks have a completely different system from A-shares, which allows trading even after the market closes. On January 24th, after the market closed, Tesla's post-market trading price plummeted, falling nearly 6% by the time of writing this article, while Tesla's closing price was only 0.63% lower than the previous trading day.

Why did Tesla's stock price drop significantly after hours? The reason is related to its just-released financial performance for the fourth quarter and the full year of 2023. If we were to describe this financial report in one sentence, it would be "all bearish except for meeting delivery targets." Let's look at the key data in the financial report and interpret why Tesla encountered a Waterloo.

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Fourth quarter revenue below expectations, profits down by 40%

From July to September 2023, Tesla achieved a total operating revenue of $25.167 billion, a year-on-year increase of 3%. Among them, automotive revenue was $21.563 billion, energy storage business revenue was $1.438 billion, and service revenue was $2.166 billion, making it very clear that the revenue from selling electric vehicles is the absolute majority of Tesla's income.

A year-on-year increase of 3% in revenue seems good, but it's not that simple. Tesla's fourth-quarter revenue was able to achieve a year-on-year increase in order to rush the annual sales target. Naturally, lowering the price of cars would sell a lot, and now Tesla has also started to take the route of trading price for volume. This shows how competitive the global electric vehicle market is.

More importantly, Tesla's revenue for the fourth quarter of 2023 did not meet the expectations of Wall Street analysts. The market generally predicted a revenue of $25.87 billion before the financial report was announced, and the actual revenue was $700 million lower than expected. Don't underestimate this $700 million; Wall Street analysts are not just for show, their predictions are usually quite accurate. Tesla's operating income below expectations is a real bearish factor.

In terms of net profit attributable to the parent company, Tesla recorded $7.93 billion for October-December 2023, a year-on-year increase of 115%, setting a historical quarterly record.

This is a data point that can be used to deceive laymen. The reason for such a high net profit in the fourth quarter is not due to a drastic change in Tesla's operational efficiency, but rather due to tax benefits. The financial indicators that truly measure the level of profit are gross profit and non-standard net profit attributable to the parent company. The fourth-quarter results were down by 23% and 39% respectively compared to the same period in 2022, in other words, Tesla's profit level has dropped by nearly 40%.

The reason for the significant decline in Tesla's profit margin level still has to be attributed to price reduction sales.

Tesla's main models are the Model Y and Model 3, which have been reduced in price several times in 2023. Although Tesla's cost control capabilities are absolutely among the best in the electric vehicle industry, coupled with meeting sales targets and generating economies of scale, it still cannot withstand continuous price reductions.Tesla's comprehensive gross margin for the fourth quarter was 17.6%, the lowest since 2019, back when the company had not yet benefited from economies of scale. Tesla's gross margin has been declining quarter by quarter, resulting in a full-year gross margin of only 18.2% for 2023, a year-on-year decrease of 735 basis points and the lowest in nearly four years.

Delivery volume is the key to survival for new energy vehicle manufacturers. Why is BYD so aggressive? It's because of its astonishing delivery volume, achieving sales of over 3 million units in 2023. Among the three major new forces, Li Auto was the first to achieve annual profitability, relying on a combination of refrigerators, sofas, and large TVs that allowed its car sales to far exceed those of NIO and XPeng.

At the beginning of last year, Tesla set a delivery target of 1.8 million vehicles for 2023, which it barely achieved. According to the financial report, Tesla's delivery volume in the fourth quarter of last year was 484,500 units, breaking the quarterly delivery record and capping the full-year delivery volume at 1.8008 million units, a 38% increase compared to 2022.

The delivery target for last year was met, so what is the target for 2024?

Tesla rarely did not disclose a specific number, but stated that the vehicle growth rate for 2024 will be "significantly" lower than that of 2023. This means that the delivery volume for 2024 will not increase by more than 38% over 2023, with market analysts expecting a possible growth rate of 20%, about half of last year's.

Musk is a very high-profile person who announces good news on Twitter at the first opportunity. This time, not mentioning the 2024 car delivery target in the financial report was very surprising to the market, which is another bearish factor leading to the stock's after-hours decline.

Of course, Tesla mentioned that it is developing the next generation of vehicles. Will the Model 4 or other new models be delivered in 2024? If the new car can bring a completely new experience, then Tesla's sales may explode, but the uncertainty is too strong, and the market hates uncertainty.

BYD and Huawei have put a lot of pressure on Tesla.

Completing the delivery target in 2023 was based on continuous price reductions. As the gross margin fell below 18%, Tesla's room for further price reductions is becoming less and less, and the sales pressure for 2024 will be increasing, mainly from two aspects.

First, the European and American markets are constrained by weak consumer sentiment.Western countries, especially those in Europe, have not yet recovered economically, and many experts predict that 2024 will be the true year of global economic recession. Electric vehicles are not necessities of life and are relatively expensive; when incomes decrease, the first consumption item to be cut is automobiles.

Tesla's strategy of trading price for volume may need to be implemented for a long time in Western countries, with gross margins and profits under constant pressure.

Secondly, the two major domestic car-making forces make it difficult for Tesla.

In 2023, BYD's annual sales volume broke through the 3 million mark and began to enter the mid-to-high-end car market, with strong performances from sub-brands such as Tengshi, Equation Leopard, and Yangwang; another major force, Huawei, also rose in 2023, with Wenjie's sales entering the first echelon, and Huawei's "Smart Selection" model, co-created with traditional car manufacturers, will gradually gain momentum.

Tesla faces a situation of being blocked in front and pursued from behind in China. The psychology of users has changed, no longer considering Tesla as the only brand for high-end electric vehicles, and consumers have more choices.

The year 2024 may be the "elimination" year for China's new energy vehicle industry. Although Tesla has stabilized and is not likely to be eliminated, it faces the reality of its market share in China being divided. The capital market has always been the most direct; if the financial report does not meet expectations, it is immediately reflected in the stock price.

Therefore, in the short term, it is difficult for Tesla's stock price to perform well. As for whether it can reach new heights in the future, it depends on whether Musk can bring new ideas to the new energy vehicle industry. The release of the new generation of home cars will play a decisive role.