About a year ago, I wrote a careful ITEM IN Tesla, Inc. (NASDAQ:TSLA), arguing that investor enthusiasm for the newly released Tesla Semi was unrealistic and unlikely to bear fruit. At the time, Elon Musk, CEO of Tesla, DESIGNATED that he expected Tesla to build 50,000 Tesla Semis by 2024. My careful article drew quite a reaction, with hundreds of commenters leaving their opinions and some of them calling me childish names.
With 2 months to go until 2024, let’s review the Tesla Semi’s rise and release so far and what it could mean for other products in Tesla’s lineup.
Tesla’s semi split was slow as expected
On December 1, 2022, Tesla submitted his first semi truck to much fanfare. The client was PepsiCo (PEP), with the beverage and snack food company placed an order for 100 trucks in 2017 with an estimated initial production date of 2019.
However, as I noted in my article, while the initial rollout of the Semi was quite an achievement for Tesla, there were three main challenges against a rapid adoption of the Tesla Semi among end customers. First, almost a year after its first commercial delivery to PepsiCo, Tesla’s website still has scant details on the Semi’s specifications (Figure 1).
The most important specifications for the truck industry are carrying capacity, or how much cargo a truck can carry per trip. Electric semi-trailers are limited by regulation to operate at a combined weight of 82k lbs, 2k lbs above the conventional maximum, but the Tesla Semi’s hauling capacity is limited by the weight of its lithium-ion battery and associated cooling and safety. Incredibly, almost a full year after the first Tesla Semi has already been submitted for PepsiCo, there is no concrete detail yet on how much the Tesla Semi can haul.
A second barrier to adoption is the infrastructure in place to support the Tesla Semi. As I noted in my previous article, Tesla’s current network of superchargers are designed to accommodate its cars and SUVs and may not be able to handle a 70-80 ft long semi trailer. So end users like PepsiCo have to build special charging stations at their service depots to charge their trucks, which limits the Tesla Semi to local deliveries for now.
Finally, in addition to transportation specifications, truck fleet owners also need reliability, serviceability and resale data before they can spend hundreds of thousands of dollars to purchase new equipment. Generating and collecting this data will take time, often many years. It was just wishful thinking by Tesla and naive investors to think the company could sell 50,000 units sight unseen based on a few promotional videos and launch events.
Could it be the production quality?
What we do know is that in its short life, the Tesla Semi has been involved in 2 national remembers by the National Highway Traffic Safety Administration (“NHTSA”). In fact, details from the 2 recalls suggest that Tesla Semi production may be 100 times less than Mr. Musk predicted in December:
“For the first recall, Tesla said the 35 potentially affected semi-trucks were manufactured between November 30, 2022 and February 28, 2023. Now, for this second recall, Tesla says the 36 affected vehicles were made between November 30, 2022 and March. 15, 2023.”
36 trucks produced in 3 1/2 months is a far cry from an annual production increase of 50,000. In Tesla’s latest quarterly report, the Tesla Semi is still listed in ‘Pilot Production’ and Tesla has not provided any production or delivery figures in its quarterly press releases (Figure 2).
So is the Tesla Semi issue due to lack of demand as I explained above, or could it be due to poor design / manufacturing quality (2 recalls in less than 1 year)? Analysts can only speculate, but I believe it could be a bit of both.
Temper your enthusiasm for Cybertruck
For Tesla investors, many have already forgotten about the Semi, as even if production were to fully ramp up to 50,000 units/year, it would only contribute a small percentage of total revenue for the company. Instead, all eyes are on the Cybertruck this holiday season, with news articles being written daily on the rumored specs and potential production ramp-up of Tesla’s truck.
What we know so far is that after several long years, the first customers for the Cybertruck will take delivery on November 30, 2023. However, only 100-200 trucks will be delivered in 2023. Instead, Mr. Musk hosts to increase production and ship 100,000 to 120,000 Cybertrucks in 2024 and 250,000 to 500,000 units long term.
However, given Tesla’s notorious delays in delivering on their promises (Tesla Semi is 4 years late and still not in mass production; full self-driving (“FSD”) 3 years late and still only Level 2, etc.), investors shouldn’t get their hopes up until we see actual mass production of the Cybertruck at Tesla’s factories. Investors should take note of what Mr. Musk said at Tesla’s latest quarterly earnings call that the company “died our grave with the Cybertruck” as it is “incredibly difficult to bring to market, to achieve volume.”
Cybertruck can’t move the needle
Assuming Tesla can deliver 110,000 Cybertrucks in 2024 in a evaluated At ~$70,000 per vehicle (incredibly, there is no exact price yet even though the product is expected to be delivered in a few weeks!), the Cybertruck could add $8 billion in revenue for Tesla. Although significant, this would still account for less than 10% of revenue for Tesla, with $96 billion in LTM revenue (Figure 3).
Price cuts lead to shrinking profits
Instead of the Cybertruck, investors should focus on the bread-and-butter Model 3 and Y sales, which account for the vast majority of the company’s sales and profits. YTD, Tesla has produced 1.30 million Model 3/Ys and delivered 1.28 million to customers (Figure 4).
Worryingly, with respect to existing models, although production and delivery volumes have continued to increase over the past year, Tesla has been slashing prices to stimulate demand. This has caused a contraction in gross margin, from 29.6% in YTD/2022 to 19.7% YTD/2023 (Figure 5).
This has led analysts to lower their earnings estimates for Tesla, with 2023 earnings estimates dropping from $6 in December to $3.21 recently (Figure 6). 2024 earnings estimates have fallen from over $7 to $4.06.
Still Funny high rating
For a company facing earnings contraction from $3.62 in 2022 to an estimated $3.21 this year, Tesla’s valuation has actually widened, from 35x P/E back in December to 72x P/E And recently (Figure 7).
Risks to be careful
Of course, I could be completely wrong about Tesla, especially if the company can resolve the production issues with the Tesla Semi and Cybertruck. If each of these products can contribute $10-15 billion in revenue, and if the company can expand its gross margins, then it’s conceivable that Tesla could deliver the 7+ EPS that some analysts expect for 2027 and beyond ( Figure 8).
However, even if we give the company the benefit of the doubt and assume that earnings will return to analyst expectations, Tesla is still expensive, currently trading at 32×2027 EPS estimates of $7.04.
Last year, I warned investors not to get too excited about the Tesla Semi, as I expected plenty of headwinds for the product. So far, I’ve been right, with only a rumored 36 semi produced and delivered to PepsiCo.
This year, Tesla is once again trying to impress investors with the first Cybertruck deliveries expected in a few weeks. Given that Mr. Musk has characterized the production of the Cybertruck as “digging their own grave,” I caution investors not to build too many expectations for the Cybertruck into their short-term models.
Instead, I worry about Tesla, Inc.’s repeated price cuts. in existing models leading to declining gross margins and profits. With declining earnings per share, Tesla is currently valued at 70x Fwd P/E, which seems excessive. Even assuming gross margin and production issues can be resolved in the coming years, the company is still trading at 32x 2027 EPS. I remain cautious on Tesla stock and rate it a STAY.