Electric vehicle producer Tesla (TSLA 0.66%) has been one of the most analyzed stocks on Wall Street since its public debut over a decade ago. While the cars have a sleek aesthetic and the underlying technology powering the vehicles seems like something out of the future, it's really the company's charismatic, albeit polarizing, CEO, Elon Musk, that has been at the nucleus of a lot of Tesla's attention.
With that said, here's a closer look at Tesla's third-quarter 2022 earnings report, the current valuation of the company, and what long-term investors should be focusing on moving forward.
Economics 101: Supply and Demand
In basic economic theory, prices tend to rise when consumer demand is rising and the supply of goods is falling. By contrast, when there is an excess supply of goods, consumer demand tends to fall, and so do prices.
For Tesla, some investors may have been initially wary of the company's demand given its slight miss in vehicles delivered during the third quarter. However, daunting as this may be, one of the most important items to take away from Musk on the earnings call is the following statement: "I can't emphasize enough, we have excellent demand for Q4, and we expect to sell every car that we make for as far in the future as we can see."
Musk is showcasing to investors that demand for the company's vehicles is not the challenge. Rather, Tesla is facing far more complex challenges, such as supply chain disruption, inflation, global energy crises, and rising interest rates.
Image source: Getty Images.
Were Q3 results really that bad?
For the quarter ended Sept. 30, Tesla reported $18.7 billion of revenue from its automotive unit, a staggering 55% year-over-year increase. However, while the top line grew at a healthy clip, it's important to note that gross margin from the automotive unit declined by roughly 2.5% year over year. Tesla's CFO, Zachary Kirkhorn, addressed the margin deterioration on the earnings call, stating: "Removing regulatory credits and Austin and Berlin, our operating margins would have been our strongest yet and auto gross margin would have been nearly 30%. Note that while small and growing, each car we build in Austin and Berlin is contributing positively to profitability."
What Kirkhorn is trying to convey here is that in order to meet its demand, Tesla must invest heavily up front in its gigafactories in Austin and Berlin. Yet, even with this ratcheted-up investment, Tesla is still net positive on each car it produces. Therefore, circling back to Musk's comments about demand, Tesla is in a position to expand its margins dramatically once the company is able to fulfill production capacities.
Another important metric to focus on in Tesla's Q3 results is profitability. Although margins took a hit, the company's operating expenses were $1.7 billion, which was only a nominal increase of 2% year over year. Because costs were relatively flat, Tesla's revenue growth far exceeded that of internal investments. For this reason, the company was able to generate $3.3 billion in net income, up 103% year over year. This is very impressive given the amount of challenges Tesla has needed to work around this year. By generating strong and increasing profits consistently, Tesla is only strengthening its balance sheet and position in the electronic vehicle (EV) marketplace.
Should Tesla investors worry about a recession?
There is no sugarcoating the fact that Tesla is staring down a lot of complicated hurdles. The cost of raw materials for its batteries is rising, foreign exchange rates are fluctuating dramatically, the global chip shortage can impact the company's vehicle production, and economists around the world are debating about the likelihood of a worldwide recession in the intermediate future.
When asked on the earnings call about the possibility of a prolonged recession, Musk said something very interesting about the EV market. He essentially said that while the market might not be entirely immune to a recession, it is resilient to one because people are embracing the shift to electric cars over traditional gasoline-operated choices.
Even if "recession resilient" is a questionable classification, Musk's assessment in the earnings call essentially reiterates that demand for Tesla's vehicles is currently -- and will continue to be -- robust. So, even in the face of a recession, Musk is bullish that consumers will still be purchasing the company's vehicles in high volumes.
However, as promising as this may sound, if you're looking to invest in Tesla stock, it's important to remember that Tesla completed a 3-for-1 stock split over the summer. Accordingly, investors should not be fooled by the company's seemingly "cheap" stock price. But the case for Tesla stock does get stronger, even with that consideration in mind. Following the company's earnings, longtime Tesla bull and CEO of Ark Investment Management, Cathie Wood, bought another 66,000 shares for her fund, the ARK Innovation ETF, which equated to a little more than $13 million dollars. Additionally, as of the time of this writing, Tesla's trailing-12-month price-to-sales multiple is 10.6, roughly half of what it was during this time last year.
For investors with a long-term mindset, now could be a lucrative time to acquire more Tesla shares. The nod of approval from a longtime supporter of Tesla in Wood, combined with the reasonable valuation and the commitment to consistent growth from Musk makes Tesla a compelling stock. Perhaps Musk summed it up best when he said: "[K]nock on wood, it looks like we'll have an epic end of year. So, Q4 is looking extremely good." As a Tesla investor, this has me more confident and encouraged than ever.
