First-quarter earnings are underway, and perhaps one of the most-analyzed companies on Wall Street got off to an electric start. Electric vehicle maker Tesla (TSLA 0.66%) beat estimates across the board, posting impressive numbers in revenue, margins, and cash flow.
It would be remiss to say that Tesla does not have a long, arduous road ahead in the hyper-competitive market of electric vehicles. But investors were given several reasons to be bullish on the future of this Cathie Wood favorite. Let's dig into the company's Q1 financial results and analyze what the future may hold.
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Cash is king
Tesla reported total revenue of $18.8 billion in Q1 2022, representing 81% growth year over year. Perhaps the most anticipated numbers Wall Street analysts and investors anticipated were margins attributable to the company's automotive segment, as well as earnings per share. The company's total revenue from automobiles was $16.9 billion, or 87% year-over-year growth. When analyzing Tesla, it is important to note that the company generates a small fraction of revenue from selling regulatory credits. Since Tesla makes zero-emission vehicles, the company is granted credits from the government. Subsequently, Tesla sells these credits to other automakers. During Q1 2022, Tesla reported $679 million of revenue from regulatory credits.
Although the regulatory credits contribute a trivial percentage of overall revenue, it is important to include these costs when analyzing gross margins. Tesla reports automobile gross margin as the difference between total automotive revenue and the cost of goods to build and develop these vehicles. However, Wall Street analysts tend to exclude regulatory credits from this analysis to derive gross margin estimates. This is because the sale of regulatory credits can move around dramatically each quarter. By excluding this figure, investors are able to get a better picture of Tesla's true margin profile. When excluding the contribution of regulatory credits to revenue, Tesla's automotive gross margin would have been 30%. By comparison, when accounting for regulatory credits, the company reported 22% gross margins in its automobile segment during the same period last year.
The significant expansion in Tesla's margins is most notable when looking at the company's earnings per share and cash flow. Tesla reported earnings per share of $2.86 in Q1 2022, which was more than a 600% increase over Q1 2021. Furthermore, cash flow from operations was $4 billion in the first quarter, compared to just $1.6 billion during the same period in the year prior.
This level of profitability is providing Tesla with industry-leading flexibility to reinvest into new products and services well beyond its competition.
The futuristic road ahead
Tesla Chief Executive Officer Elon Musk is notoriously secretive when it comes to the company's product roadmap. However, during the Q1 earnings call, Musk entertained the investor community and hinted at new innovations the company plans to roll out. Namely, he briefly highlighted the development of a new vehicle dubbed the "robotaxi" as well as a humanoid robot called Optimus.
The robotaxi will play an integral role in Tesla's pursuit of fully self-driving vehicles. One of the reasons that this taxi fleet could be a lucrative growth engine is its margin profile. For context, ARK Invest CEO Cathie Wood recently released a detailed financial model and business case outlining her expected value for Tesla by 2026. The savvy tech investor has slapped a price target of $4,600 per share by 2026 for Tesla. Although she only expects roughly one-third of revenue to come from the robotaxi, she believes that over 50% of future earnings before interest, taxes, depreciation, and amortization (EBITDA) will come from this new line of business, implying this will be a much higher-margin business than the legacy vehicle business unit.
In addition to the autonomous taxi fleet, Musk provided updates on Tesla's artificial intelligence efforts, namely its humanlike robot Optimus. The genesis of this project is that Tesla's leadership has a vision to make all of its gigafactories as automated as possible. This means that over the long term, many applications in the factories will be led by precision robotics, which could lead to massive economies of scale. It's important to note that Wood believes this development to be more than five years away. However, Musk seems determined to pave the way for the future of manufacturing, stating, "Optimus will be worth more than the car business and Full Self-Driving, Tesla's suite of advanced driver-assistance systems, that's my firm belief."
What about competition?
Although Tesla may grab the most headlines in the electric-vehicle space, it certainly is not the only player. Tesla primarily faces competition from other battery-powered car companies such as Rivian and Lucid. Moreover, legacy automakers such as Ford and General Motors are also investing heavily in the space.
Perhaps what separates Tesla from its competitors is its ability to generate strong operating efficiencies, allowing the company to double down on new innovations and features. For example, Rivian was a pre-revenue business before 2021. While the company holds over $18 billion of cash on its balance sheet, it is only producing roughly 2,500 vehicles per quarter. By comparison, Tesla produced over 300,000 vehicles in Q1 2022.
Tesla's choice to double down on factory automation and heavy research and development during its early years is paying off. The company is moving past its competition in real-time, and many investors believe the company could just be getting started. Following its Q1 earnings report, several Wall Street banks increased price targets, which should be an exciting and encouraging sign for investors.
