The last year hasn't been a great time to be a Tesla (TSLA 1.85%) shareholder. The stock has dropped over 45% in the past 12 months, yet the company is still valued at nearly $600 billion. The company's newly released first-quarter earnings report was widely anticipated for that reason.
The stock's high valuation is based on the belief that the EV leader would see massive growth as the popularity of electric vehicles took root and spread beyond early adopters. The thing is, the company is doing its part as it continues to show impressive growth. That could mean the stock's decline offers an opportunity for those who missed out on early gains to own a piece of the EV trailblazer.
Margin concerns
Automotive gross margin decreased over the course of 2022 as Tesla battled supply chain snarls and rising raw material costs at the same time it was working to ramp up production at its two newest factories. Those supply chain and inflationary headwinds weren't unique to Tesla, of course. But investors and analysts have focused on how its gross profit margin -- excluding leasing and credits -- could be more permanently impacted by rising competition.
Automotive profit margin went from more than 30% in the 2022 first quarter to below 26% in the fourth quarter. Tesla has selectively cut vehicle prices in all of its major markets either as a strategic move to maintain market share or to boost waning demand. Investors have been waiting to see whether the company could keep its profit margin at or above the 20% level that Tesla CFO Zach Kirkhorn predicted it would maintain in the company's fourth-quarter conference call for investors.
Now investors have the new data from its first-quarter earnings report. It confirmed that the metric did drop both year over year and sequentially. Automotive margins sank to 18.3% in the first quarter. The company addressed that by stating, "Our near-term pricing strategy considers a long-term view on per-vehicle profitability given the potential lifetime value of a Tesla vehicle through autonomy, supercharging, connectivity, and service."
In other words, the company believes the value proposition remains strong for Tesla buyers over the long term. And it also noted that vehicle pricing strategies would continue to evolve both upward or downward depending on many factors. It's also reasonable to think that increasing scale and vertical integration, along with improved operating efficiencies at the newer facilities, can improve margins.
Profits keep rolling in
Last year, the company earned $12.6 billion in net income while generating $7.6 billion in free cash flow. That cash flow was achieved even after the company made more than $7 billion in growth investments in 2022.
Data source: Tesla. Chart by author.
Tesla recorded another $2.5 billion in net income in the 2023 first quarter on sales that jumped 24% year over year. It also continued to add to the cash pile on its balance sheet even as it invested for future growth.
And the investment thesis is not solely about its vehicle sales. The company's energy and services segments -- which includes Supercharger revenue -- represented 14.4% of total revenue in the quarterly period. That's up from about 12% in the prior quarter.
Tesla's energy and services businesses continue to outperform.
To buy or not
An investment thesis for Tesla is unlikely to play out in just a year or two from its current valuation. Excitement over the company and the EV sector drove the stock to lofty levels already. It recently traded at a price-to-earnings (P/E) ratio of around 50 based on 2022 results.
Even as Tesla sacrifices some margin on its automotive business, it continues to invest and grow to increase future profits. And it is doing that from a position of strength relative to its competition.
The market may focus on price cuts and the resulting decline in profitability from the recent report and punish Tesla stock in the short term. But for those with long investment time frames, that becomes an opportunity to buy the stock now.
