Hey guys, it's Sasha Last night Tesla published their Q1 earnings and there was a big problem in the numbers. Now I Am going to cover the key parts of the Tesla Q1 results and share some highlights from the earnings call. but the really interesting bits were not in the presentation and they were not in the call. There were things that were not in the presentation or the colon, things that you would need to read between the lines.

It was a lot more subtle than that. and rather than just repeat the same key points that you've probably already read and heard from everybody else I Thought I would share some of this. Insight Just be mindful, this might go a little bit into geek territory. A little bit like discussing a chest position and showing you what might happen in 13 move time.

But here are the results from Q1 And before we look at the numbers, let me show you these results next to the results from last quarter. Do you notice any difference? Because right up until last quarter, the format of the results was exactly the same every single time while the numbers were moving in the right direction and showing the right trajectory. But Tesla has now gone down the road of massaging the presentation of the results so that they don't have to show some of the ugliest data data that doesn't look good. And as an analyst, I Absolutely hated when companies massage a presentation of data even if that company happens to be the biggest position in my portfolio.

I Really do not like this sort of thing at all because first, they removed the second line in the table which showed how much of the automotive Revenue came from regulatory credits. It was there every single time, but it just happened to disappear in the one quarter where margins were squeezed because Tesla has been cutting prices to stimulate demand. and at the same time, the automotive gross margin line has also mysteriously disappeared. And here is the reason why those disappeared.

If you look at the detailed P. L all the way down on page 23, right at the back end of the presentation, you can see that Tesla actually made 521 million dollars from regulatory credit, which is more than in any of the last three quarters. Pretty good, but you can Also, you see the Tesla made 441 million dollars in free cash flow. So the reason that they removed regulatory credits from this table is so that you can't immediately juxtapose those two numbers together.

They're not on the same page and so you can't tell that without the regulatory credits. Tesla actually had negative free cash flow this quarter. Now, there isn't anything necessarily wrong with having negative free cash. So given everything that's happening.

but I'd prefer a company like Tesla to maybe be a bit more transparent and just say things how they are. Now they still posted a gap. profit net income was 2.5 billion dollars, but they spent two billion of that on Capex, so free cash flow was a little bit lower than it has been recently. and after you take out regulatory credits, that number is negative.

And then they also removed the automotive gross margin line. You can see that it was running at 30 before the two new factories opened. Then, as the new factories opened and started piling on the cost, the margin dropped a little to 27.9 percent. Then in December Tesla started doing price cuts and we've had pressures on the cost of Commodities and the margin has dipped to 25.9 percent.

but we don't have this number in the report for Q1. What gives? Well, if I take the numbers from the detail table at the back and work it out on my Casio The automotive gross margin drops to 21 and if you take out the regulatory credits, it drops to 18.7 and this is a very substantial drop. And remember that there were big price cuts in January but then there were way more price Cuts As we move through Q1 all the way through to March there were big price Cuts in March and we have already had two really big price Cuts in April the first month of Q2. So these margins are going to fall a lot more when we see the Q2 data because the prices were dropping all the way through Q1 and in Q2 they will be applying for the whole of their quarter.

Plus, we've had even more price Cuts since the end of Q1, and on the one hand, it's not a big deal because Tesla is dropping these margins knowingly on the last earnings score. Elon Musk Was saying that Tesla will happily sacrifice margins in the short term to grow volumes, and at the moment, there are natural pressures on demand. We all know them: the economy is not doing great. High-end relation means people have less money to spend, interest rates going up means monthly payments on cars.

uh, a lot more expensive. So when you would expect demand to be under pressure, it is. And Tesla is combating this by reducing prices. Extremely logical and very perfectly normal.

And although they have seen a big drop in the gross margin 21 in the absolute sense is still very good given what's happening in the economy. and Tesla's competitors who are losing money on every EV that they sell have paid Tesla another half a billion dollars in credits because they still can't figure out how to manufacturing visas scale, so that is going to help. That margin will dip below 20 next quarter. That much is pretty much guaranteed, and it could go as low as 15 or lower down towards the low teens.

But Tesla's operating costs have been incredibly robust, so free cash flow will probably be negative, but not too bad, but the business will still be profitable on a net profit basis. The problems really start in the Q a section of the earnings caller because the very first question that was asked said, what is the process to make Auto pricing adjustments What variables do you consider? How frequently do you review pricing an Elon Musk Basically refused to answer the question. Given margins are under such severe pressure, it would be weird if investors did not have concerns and want to understand a bit more about how pricing Works How does Tesla make the decisions? Is there any actual kind of strategy? Or Does Elon just tell people go and quickly reduce prices Quick. Go and change it on the website.

It's a strategy just to move prices as necessary to ensure that they shift the stock of cars or whatever the margin happens to be because if it is, that is a perfectly valid strategy at a time like this. But Elon Didn't want to say anything at all about pricing in the quarter where Tesla dropped their prices by about 20 percent. and as an investor, that is really not a good way of dealing with the issue. this is really not a good way of dealing with a valid question from investors in your public company.

These are the investors that have enabled Elon to go and sell a bunch of his shares and make the biggest private acquisition in history when he bought Twitter So Elon has got a massive benefit from Tesla being a public company. Tesla went public in order to be able to get funding to grow. Maybe Tesla wouldn't be here if they weren't public and I think it would not be unreasonable as a result of being a public company to answer genuine questions about major strategic moves in the quarter in which you happen to make them on the earnings score. So I'm not a big fan of this approach.

A few questions later, this one came up: What do you anticipate Financial Year 23 Automotive gross margins excluding credits will be at the company's current pricing levels and again Tesla basically skipped it and ignored the question. Next question: how has Global Order intake tracks? Since the most recent round of price? Cuts Elon gave a one sentence answer saying that Tesla has more orders than it can manufacture, Which is not much of an answer because clearly these orders are a result of the price dropping and Tesla has been consistently delivering less cars and maybe be making in recent quarters because if the orders were there anyway, if Tesla just could not possibly fulfill all their orders people just ordering so many Teslas that is struggling to make them and deliver them to the customers that are buying them, why would you drop prices out of the goodness of your heart Because you know it's just so nice. Such a nice little thing to do because Tesla's a charity and believes and philanthropy of just giving people electric cars for the least possible money just because you know it feels good here. Customers take a 20 price card because we thought it would be nice for no reason to celebrate spring.

The one very positive bit of news though came from the energy division because Tesla has been scaling the mega Factory in Lathrop California and that factory is now beginning to pay dividends. Revenues for the energy business increased to 1.5 billion dollars and it made 168 million dollars in gross profit. Now these are still very low numbers compared to the car business almost inconsequential, but energy has now become profitable on a gross basis and the revenues and profits are increasing. They have a new Mega Factory that they're starting work on in Shanghai as well.

The lateral Factory still has some way to go on the ramp. So this is pretty exciting news for investors because energy should in the long term become a much more meaningful part of their raw business. That Kirkhon said on the call that Tesla is wanting to get the energy business to a gross profit of over 20 in the long term. But let's quickly talk about this margin problem because Tesla The company is doing great at a time when other car makers are struggling.

Volumes are collapsing. Tesla is continuing to grow production and their production is still profitable. However, Tesla The stock is not the same thing as Tesla the company. Many investors confuse the two and don't understand the difference because Tesla The company.

can be the best company in the history of the world. They can move the whole world to sustainable energy. They can sell 20 gazillion cars per year. Bloody bloody blah.

But Tesla the stock can still be overvalued if Tesla can't do this while printing a load of money because Tesla valuation is based on very high margins multiplied by very high volumes that are growing into the future. You need both for the stock price to be justified and for it to go up from here. Tesla stock is now down seven percent in pre-market trading after the set of really bad results. and it's pretty bad.

But it's not because people are panicking, it's not because people are dumb, it's not because people are saying until you're in Japan or whatever Fanboys like to say is because people have a natural concern on the way that Tesla have been answering their questions or not answering questions, on the way that they are being very coin cagey on the way that they're beginning to massage data where previously they were incredibly transparent. The go-to expectation was that as Factory scale, economies of scale will take hold and Tes will be able to print 25 to 30 margins on their cars when you include software, sales, etc etc etc. Now we're in a situation where the gross margin excluding credits is down at 18 point whatever percent and it's going to be below 15 in Q2 Maybe a lot lower than 15 at the same time Tesla is scaling production. Eventually, the economy will improve, inflation will go away, rates will go back down, and Tesla should find it easier to sell cars.

demands should naturally pick up, but how much elasticity will Tesla have at that point? Let's say Texas and Berlin fully ran to 500 000 cars or whatever by that point, let's say gig in Mexico starts production and will also go to 500k initially. So Tesla will be sitting there making three to three and a half million cars a year. Nice. It's easy to have huge waiting lists High margins when you're making 500 000 cars a year.

As what happened not too long ago, it's not going to be so easy when you're making seven times as many cars. When you're counting them in the millions because if you start pushing margins up at that point, you will naturally have a detrimental effect on demand. Now, this isn't a black and white sort of thing. Apple is one example where relatively High pricing does not destroy demand because the quality of the product and the buy into the ecosystem.

All the perks and benefits that you get with it are strong enough that customers are prepared to pay the relatively high prices. The question that investors have to answer though, is whether Tesla is going to get to that level of buy-in from their customers on the earnings call. Elon said that Tesla might sold FSD by the end of this year this is the eighth year I think that he said something like that. So given that we're in April and where we are at the moment in development I give that approximately zero percent chance of happening.

but if full self-driving really does get there, maybe in two to three or five years or whatever, and Tesla unlocks a huge new Revenue stream. At that point, there is a possibility that the vast majority of people buying the car today will then have the opportunity to spend more money because most people today do not buy FSD depending which data you trust. It's maybe somewhere around seven percent of the people buying Tesla's buy FSD with it, but if FSD comes through eventually which I think it will, it's just a matter of time with enough work and compute power. I Really don't think we're actually as far as some people think it will take time, but it's not impossible at that point.

Tesla may have a printing machine. A money printing machine where instead of fifteen thousand dollars or whatever that it costs a day, people might have to pay twenty thousand, twenty five thousand dollars or whatever the going rate is at the time and the gross margin on every incremental sale of FSD which is basically software will be Mighty close to 100 in the long term I Don't have any major concerns because Tesla continues to be several years ahead of any competitor. They're the only car company that is working on General solution for self-driving They have ridiculous profitability ahead on the path, and they are a disruptive company in the true sense. a bit like how Apple destroyed Nokia Blackberry But in the short and median term, these developments will probably mean that the waters for Tesla are going to be incredibly choppy.

Investors are going to lose their over margins, negative cash flows, and we still have the problem of production scaling from 2025 onwards. The next two years. Not really a big deal because these new factories are going to be scaling and that will naturally allow them to increase production, but from 2025 onwards, we don't really have many levers. We have one gigafactory in the works in Mexico.

The Nevada one making the semi trucks doesn't really count, so when the existing factories reach capacity, it's unclear where really substantial growth in manufacturing is going to come from. Sure, Tesla will optimize their process, blah blah blah, but that ain't bringing you 50 growth per year. To get 50 growth per year. For the next few years, you need a lot more Factory buildings.

The Berlin and Texas factories have plenty of space there for more buildings, but they still have to be built. Construction is still going to take a very long time because they're huge projects. You still need permits so from whenever they get an announced, we're still gonna have to wait quite a lot of time before they are operational. And as an investor, time is really important because every year that growth is delayed means that you're discounting future profits on the back of that growth by another 10 or 12 percent per year that they're delayed.

and that affects the company evaluation in a big way. Now I am going to update my model and valuation I'm going to share it in the Discord for anyone interested if you want to join my Patreon, the link is in the description to discuss this in more detail. If you found this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching and I'll see you guys later.

Thank you.