Earnings: Tesla ‘a fast-moving target,’ analyst says

Jefferies Managing Director Global Autos Research Philippe Houchois joins Yahoo Finance Live to discuss Tesla earnings, uncertainty for the EV maker, Model 3 and Y price cuts, the expectations for Tesla moving forward, and the outlook for the auto industry.

Video transcript

JULIE HYMAN: Elon Musk tried to end investor uncertainty about vehicle demand on the earnings call last night, suggesting that the EV maker's recent price cuts have resulted in a surge in orders. Musk said on the call that January has had the strongest orders year to date in Tesla's history. And this, by the way, is a relief for investors because those orders had been trending downward, right, for a couple of quarters.

So to see this bump there, according to Musk, I mean, it's a good thing he made that comment because otherwise, this was not a fantastic report. Earnings did beat estimates, yes, but automotive gross margins were below estimates. Free cash flow was way below estimates. And so it feels like the gain that we are seeing in the stock is mostly due to tone on the call, rather than the hard data. You're just waiting. You're just waiting.

BRIAN SOZZI: No, because I think you're right, Julie. There was a lot to unpack here. And I have a story on this now on the Yahoo Finance Homepage, digging into that earnings call. And of course, you and I, Brad, talked about it after the call last night. And in addition, Julie, you had a sleepy Elon Musk. He had a lot going on. He just did not sound like the normal Elon Musk, whatever you would like to hear from him.

But I think the stock is also trading off of the investor day that is coming up in March. A lot of, I think, new product announcements were teased by Musk on that conference call, giving hope that maybe by mid-year and the back-- or the back half of this year, you get a reacceleration in growth out of Tesla. But of course, Musk did warn a good deal about recession.

BRAD SMITH: He did, and when he talked about a recession-- and this is what the stock was initially reactive on in after-hours. And it continues to move higher here, at least pre-market. Right now, it looks like it's up by about 10% at one point. But it's really how he framed it and how it would impact Tesla. He said if the recession is a serious one-- and I think it probably will be, but that will be leading to meaningful ones. And actually, I believe we have the shot, so let's just take a listen here. Sorry.

ELON MUSK: If the recession is a serious one-- and I think it probably will be, but I hope it isn't-- then that would lead to meaningful decreases in almost all of our input costs. So I would expect to see deflation in our input costs most likely, which would then lead to better margins. I'm just guessing here. So that would be my guess.

BRAD SMITH: OK, so you heard his words. You didn't need to hear me kind of recite my chicken scratch that I'd written down.

BRIAN SOZZI: I love those things. That's great.

BRAD SMITH: --in the middle of the call. I know.

BRIAN SOZZI: It's awesome.

BRAD SMITH: It really is. You can't read it very much. But at the end of the day, it really comes down to some of those raw materials costs and saying that this would actually be a deflationary type of environment that they would be looking at in some of those materials costs. And one most notable material is lithium. It's raw materials and inflation led by lithium prices that they talked about in previous calls that they talked about at length in this call. And that's going to continue to impact their cost of producing cars over the course of 2023 as well.

BRIAN SOZZI: Yeah, if you're buying Tesla shares here at the open or looking to, you also, I think, generally have to have a belief that these price cuts that they just enacted, will not take that gross margin, to your point, Julie, below 20%. And then they will also lead to a demand reacceleration in the first quarter and then an acceleration off of that into the second quarter. But again, a lot of unknowns there, just given wherever you are in this economy.

JULIE HYMAN: I mean, the company said-- they said on the conference call they're not going to go below 20% on the gross margin. So do you believe them? Do you believe that the costs are going to abate? The CFO cited not just raw materials and inflation as to blame for the increase of cost of goods sold. They're also working through the early ramp-up inefficiencies in Austin and Berlin factories. So, in theory, that should abate over time as well.

They also said the vehicle mix over the last year has moved more heavily to the Model Y, which costs them a little bit more to make than the Model 3. So will that remain in place, or will that-- the real question is, will each of those things correct enough to boost the margin once again? I do believe someone asked them on the call, will the profit per each car return to the level where we saw it, say, two years ago? And it sounds like that's not going to happen this year at least. And again, there's this tone of uncertainty about when they're going to be able to get back to those levels.

BRAD SMITH: Yeah, absolutely. They've noted an average selling price right now of $47,000. So that margin, that 20% margin basis on a $47,000 average selling price is what we're going to get into with our next guest as well. What should make investors of Tesla stock after the earnings report? Let's bring in Jefferies global autos analyst Philippe Houchois, who is joining us this morning, longtime bull on Tesla, just recently slashed the price target on the stock by 50%. Why?

PHILIPPE HOUCHOIS: Look, if you look at what happened in the past few months, the combination of the market, rates going up, the absolute growth story around Tesla being questioned and also what happens to the inflation of gross margin, so I think we've put that into context of lesser growth uncertainty about the margin progression, much more volatility, and a different environment that led us to revise the upside of that stock.

JULIE HYMAN: So you still, though, again, are a buy on the stock. Would you be a buy particularly in the wake of this report?

PHILIPPE HOUCHOIS: Well, what yesterday-- what was interesting is it was a miss definitely, but I think the consensus right now is a big, fast moving target. So it's hard to-- I think it was within the margin of error. I think there was, as you discussed, I think earlier, there was a number of indicators about as they ramp up other plans, battery cost improvement, that-- and the IRA impact as well could easily reverse maybe five percentage points of margin. So I think this is not going to happen immediately over the next four or six quarters. I think that's the clawback in margin.

And that was quite interesting. And I think what's important to us in Tesla for us is two things. The issue entering '23 models was affordability everywhere. And Tesla is a brand that is-- the mission is to make the transition possible, and therefore affordability is the core value. They've addressed that. For a while, they enjoyed, like everybody else, excess earnings in COVID, and they decided to take a look at their cost curve and then decide to go for affordability. That's a very important event for us in the industry.

And then, of course, Tesla continues to challenge just about everything the industry does. And we think that if they execute and what they intend to do and they deliver it and are able to put in place what they want to do, I think the outcome is a much more efficient auto industry. But that's going to take some time to validate that. Those are for us the key beliefs that we have around Tesla.

BRIAN SOZZI: Philippe, how concerned are you that Elon Musk is just doing too much? Now little-- we were hopping-- we were on the earnings call last night. He sounded a little sleepy, all right? He's testifying in court. He said he spent Tuesday late night talking to the Tesla AI Team. And then on Twitter, a couple of hours ago, he said he-- after he did all that, he spent more time at Twitter's headquarters. I mean, Elon Musk is Tesla. How concerned are you that he's being stretched thin and Tesla is going to be impacted?

PHILIPPE HOUCHOIS: Yeah, no, it is a concern. It has been for a long time. And I think we've published research many times in the past where we say the thing is, one, the enemy is inside of Tesla. And Musk is an incredible driving force, but he's also the one that brings unnecessary risk, in a way, to the situation. At the same time, what we have to keep in mind is what we say as well is Tesla is bigger than Musk. So he has been the impetus.

The question with Elon Musk is, as an individual, he does a lot of things, maybe too many things, but it's not like he's going to listen to-- if you tell him what to do, he's not going to do it. He has to self-correct. So he is the person who is going to decide, can I do SpaceX, Tesla, Twitter? Do I have to--

BRIAN SOZZI: Can he, though?

PHILIPPE HOUCHOIS: Can he get more?

BRIAN SOZZI: Do you think he can?

PHILIPPE HOUCHOIS: Exactly, no. Well, that, again, is, you're not going to tell him, and I'm not going to tell him because he won't listen. It's up to him. He's going to have to make that decision. And what we need to be comfortable with as investors, let's say, Tom Zhu has been rumored as being a number two coming in. Great news that he's got the value of Tesla, so that's an internal point is very important. But will he be given a free rein to run Tesla if that's what is decided? And that's the part that is going to take time for us to get comfortable with that. Again, the self-correcting mechanism that Elon Musk is Elon Musk and nobody else.

JULIE HYMAN: Well, Philippe, at the same time, though, is Musk too dismissive of how he's perceived? Forget about the, is he working and doing too many things? He's like, oh, I have 127 million followers on Twitter. So I'm doing just fine. Like, all of those people who follow him like him and are going-- are our potential car buyers. Like, do you think he has a blind spot here on this front?

PHILIPPE HOUCHOIS: Probably. I mean, that part of the conference call was the best part of it. And so, yes, no, there's a risk that he goes in a direction, believes in something, and then consumers are somewhat turned off or disappointed. I think that's definitely a risk. And I wish we didn't have to deal with that. But it's been part of the package. It's the package. And then Musk can redefine the package. We can't.

BRAD SMITH: OK, but I think at the core of this, too, even if you're talking about a guy that has 127 million Twitter followers, there's still a Musk that has offput so many of the potential buyers. And even some of the retail investors who had chimed in on say and submitted that question, they're recognizing what kind of hit that could mean to the brand in the future.

PHILIPPE HOUCHOIS: No, it is a risk to the brand. I think the brand is interesting because the brand is very-- we say before, it's a messianic brand, in a way. It's about to make the world a better place in many different ways and all this. And it's very difficult. It's such a vague way or unfocused brand. It's very, very difficult to manage. But again, going back to what is Tesla about when it comes to cars, it's to make the transition happen. The faster, the better, to some extent. And to do that, you have to have affordable product.

And the product is still very attractive. And all of a sudden, it becomes much more affordable. And so I think as consumers, yes, you can have reservations about all kinds of things, but you'll be looking as a consumer, is this a product that fits my needs? Is it affordable? And right now, we'll see how the rest of the industry responds to what Tesla has been doing. But right now, it's a very, very good value proposition.