Lack of Tesla margin guidance draws analyst fire

Tesla stock rebounded slightly on Monday after its plunge last week following its Q4 results and conference call. But it still finished down by more than 8pc compared to last Wednesday’s close — which in itself was some 20pc lower than a recent peak just after Christmas, before disappointing Q4 sales reported at the start of January dragged the stock lower (see main image).

And that sales volumes-driven drop is why some analysts were caught off guard by the additional swoon last week; their view had been that the bad news had already been priced in.

The main factor in the additional loss of ground is a lack of guidance provided on the Q4 call — about sales this year but particularly about 2024 margins.

Margin guidance expectations

“You cannot keep giving away that margin advantage,” Dan Ives, managing director, equity research at US brokerage Wedbush and a long-time Tesla bull, told US broadcaster CNBC ahead of Tesla’s results. “It is a moment of truth around margins. I think investors’ frustrations have built.

“In 2024, you cannot continue to cut prices. If they talk about an uptick [in margins] from here… at that point, the bottom is in for the stock,” Ives predicted.

“The real story is what they did not say for 2024 guidance,” another analyst, Tom Narayan of bank RBC Capital, told Yahoo Finance, speaking after Tesla had published its Q4 financials but before the conference call. “We have to see what they say on the call, ultimately. We do not have anything about gross margins for 2024, someone will definitely ask about that.”

And Narayan warmed to the theme. “Number one question is, will automotive gross margins be up in 2024, or down?” he said of how he saw Tesla’s analyst call going. “There has been price cutting on Model Y in Europe and China.

“The consensus – and ourselves – is baking in margins going up by about 100 basis points. If it comes down, that is concerning, because that means, ‘Oh boy, do we have a profitability problem?’”

Lack of clarity

But, on the call itself, Tesla’s CEO Elon Musk and CFO Vaibhav Taneja did not commit on either 2024 sales volumes — other than growth would be “notably lower” than 2023’s 43.5pc —or on gross automotive margins, with the latter saying margins are a “very difficult thing to predict precisely”.  

“Predicting auto gross margins is extremely challenging since there are many moving parts to this equation, some of which are out of our control like the change in tariffs or local incentives to name a few,” Taneja said.

And Musk was equally evasive. “We do not have a crystal ball, so it is difficult for us to predict this with precision.

“If the interest rates come down quickly, I think margins will be good. And if they do not come down quickly, they will not be that good,” he offered.

That did not go down well with analysts. “We thought… they would put a line in the sand on margins, price cuts are mostly over,” Ives told CNBC in the aftermath. “Instead, it was a circus show for a conference call.

“They left the door open for price cuts, did not give guidance. It went off the rails,” Ives complains. “No doubt, in the near term, it has been a disaster this week.”

Wedbush has responded by removing Tesla from its “top picks list because, in the near term… you do not have the catalysts where you could say, ‘this is going to outperform in the next 30 days [or] in the next 60 days’”.

Gene Munster, managing partner at investment manager Deepwater Asset Management notes that Tesla’s automotive gross margins ex-credits actually improved quarter-over-quarter in Q4 to 17.2pc, up from 16.3pc in Q3. But this is only a silver lining, in Munster’s view.

“The bad news? In 2024, I expect margins to decline, given this year will continue to see investments in the next-gen platform and CFO Vaibhav Taneja’s commentary that the company is approaching a limit in cost improvements on the current platforms,” Munster says. “This means we have to wait until the next-gen platform ramps, which will likely be in late 2025, before we see margins move back above 20pc — which is still well below the peak at around 29pc in mid-2022.”

And he argues that gross margins “are central to the Tesla investment case because the metric best gauges whether the company is on track to be valued as a tech company or just another automaker”.

“Tech companies have higher valuations because they have higher margins. Tech margins are higher because of the ability to use hardware to sell higher-margin software and services,” Munster continues. “That investment thesis [for Tesla] is on pause for the near term."

Longer horizon

But the trio of analysts all agree that — while lack of margin guidance is a short-term drag on the Tesla share price — it is largely a sideshow to the longer-term story for the stock. “These are all near-term dynamics. This stock is not about the car business in 2024,” says Narayan.

“While it may take five years to get back to those record margin levels, I believe that potential remains on the table with a combination of more efficient manufacturing and growth of higher margin FSD software revenue,” Munster predicts.

And Ives has left Tesla as Outperform. “It is my view that, going forward, the margin story is going to trough. When they cut costs, you can start to get margin expansion [of] 20-30pc. And all of a sudden $5 of earnings becomes $8-10 when you look at the next two years,” the Wedbush analyst says.

While he concedes that the stock slump is “more than an air pocket”, it has not dented his longer-term confidence. “We are going to see, at one point, 2.5-3mn vehicles a year. And, at that point, we will look back at this more as an opportunity — a very bad bump in the road — rather than what I would call a structural change in the story,” Ives foresees.