Tesla's Q2 2023 Earnings: What You NEED To Know

Intro

The biggest takeaway was that an auto OEM is in talks to begin licensing Tesla FSD. More will follow, just as they recently capitulated and adopted Tesla’s charging stations, another domino is soon to fall. Maybe next Tesla will build their cars for them (only half kidding). Let’s look at some highlights and my key takeaways. Be sure to stick around to the end because Elon even gave us a master class in investing that I’ll touch on! I’m feeling sick today but am determined to get this out so bear with me if it’s shorter and snippier than usual. This was a fantastic report, despite what the headlines will say!

Highlights

Tesla reported record quarterly revenue of $25 billion with a 9.6% operating margin. Bears will say Tesla is just a car company and their high margins are gone. Yet if one opens their ears and listens, Tesla clearly outlined their strategy which is to sell the highest volume of cars while maintaining a healthy enough margin to enable them to continue to invest massively into what will drive the future of the business. You know, AI, robots and such. Put another way, they have an ambitious long term plan that they continue to execute in a calculated manner, while running an efficient operation with no plans to slow down their innovation. They are prioritizing the long term health and prosperity of the company, instead of painting a prettier picture with higher margins short term, because ultimately this would put them in a weaker position. Wall Street only cares about quarterly performance, even if it means running a company into the ground over a 10 year period by focusing only on short term window dressing (see General Motors, IBM etc.)

The Tesla model Y was the number 1 vehicle sold of any kind. Considering it only went into production in 2020, I’d say that’s a big deal.

Their target to sell 1.8 billion vehicles this year remains on track and would amount to another year of growing 50%. It is extremely difficult for companies of this size to grow 50% annually.

They briefly mentioned Robotaxis will have the most units sold by far and follow a revolutionary manufacturing process. This has been the trend with their recent products that really began with the Model 3 in 2018. Tesla continues to release industry leading technological innovations on the product side, yet perhaps even more importantly, they innovate just as much on the manufacturing end.

On autonomy, they reiterated there is no substitute for data and Tesla has the most with their fleet of cars with full self driving beta. They are far ahead of the pack when it comes to autonomy, perhaps by an order of magnitude. You will see “competing” systems like Cruise or Waymo, yet these systems only operate in geofenced, pre-mapped locations. They are essentially like a train on a track, whereas Tesla cars are thinking for themselves, actively making decisions and rapidly improving. This is in part thanks to the 300 million miles that have been driven using FSD. Yet this number will soon be dwarfed as more cars are sold and more users opt in for FSD. Tesla will soon have billions of driven miles of data.

They see a clear path to full self driving being 10x safer than average human driver in a short amount of time.

Globally, Tesla has 50,000 supercharging connectors at 5,000 locations. The rest of the world will soon follow the trend we’ve seen play out in the USA. That is, the NACS charging standard, led by Tesla, which Ford , GM, Mercedes and many other OEMs will be using.

A very important point Elon wanted to emphasize: They are open to licensing FSD software to other car companies. This is huge and as I mentioned earlier it sounds like 1 company is already in talks with them:

https://twitter.com/TashaARK/status/1681781576873439233?s=20

Financials

Here are the important financials. Every segment grew massively year over year, perhaps most notable was the Energy segment, up 74%, which is still quite under the radar but incredible. I’ve touched on it in past articles as you’ll see below, I’ll link to the full article beneath.

They continue to invest heavily in the core technologies that will drive long term value of the business including AI related technology, FSD, Optimus, Dojo and new products such as the Cybertruck, the Next Generation Platform and Semi truck. As you can see, they have quite a line up and are busier with those products than worrying about a couple percentage points in the short term.

In Q2, Tesla generated $3 billion in cash, pumped $2 billion back into the business with capital expenditures and was left with over $1 billion in free cash flow. This grew their cash position to over $23 billion.

“I think it’s ridiculous that we have positive free cash flow in a capital intensive business while investing massive amounts of money in new technology. That is super hard.” - Elon Musk

I would not gloss over this fact. Tesla is operating like 10 start ups in one. I don’t think that this has ever been done before, usually a start up has maybe 1 good idea and is burning money to try and achieve it. They’ve been able to juggle this through an extremely calculated approach that has a dual focus on maximizing efficiency while constantly innovating. They are able to do incredibly big things with seemingly small amounts of money compared with other companies like META 0.00%↑ and GOOGL 0.00%↑ who we’ve seen incinerate lots of money without much to show the past few years. I believe it is a testament to the quality of employee Tesla attracts and the empowering nature of the company’s culture.

To sum up this point, I don’t see how it’s possible for anyone to catch up. Tesla continues to grow their R&D spend and they continue to invest in capacity expansion. But it is almost as if not a single $1 is wasted which enables them to move at lightning speed while preserving positive margins. Their 2 goals: maximize volumes on both the vehicle and energy business, but most importantly in a way that generates the capital to continue the rapid pace of R&D and capital investments. They have a constant funnel of the best talent as year after year, Tesla and SpaceX go back and forth as the #1 and #2 desired work destinations for graduating engineering students. The companies that win out in the long run tend to be the ones everyone wants to work for.

Other car companies are copying Tesla’s Gigacasting approach - shocker - which enables them to greatly reduce the costs and complexities associated with car manufacturing. They continue to set the industry standard. Elon anticipates the Optimus humanoid robot will be carrying out useful tasks in Tesla factories next year. This will start making an impact on the balance sheet long before these robots are even sold to the public.

A Brighter Future

Tesla drivers are now able to “charge on solar”, that is, charge their vehicles with excess solar (from their Tesla solar panels). They can then drive using only sunlight that hits the roof of their home. Sustainable energy… why aren’t ESG and self proclaimed environmentalists rejoicing about this?

To top it off Elon touched on how the convergence of Neuralink and robotic limbs (that Tesla is producing for their autonomous Optimus robot) will enable amputees to walk again! This is the same man the media wants you to hate?

Elon’s Investing Masterclass

On the earnings call we even got a master class on investing.

Elon expressed his views that buy and hold investing is the way to go. To paraphrase: Identify a company who’s product you love. Does it seem like they’ll continue to make great products? Buy that stock and hold it. That’s it, you will win. Buy stock in a company that has a great future pipeline.

“Provided you’re confident about what that companies’ products or services are, when the market panics buy and when the market is overly exuberant you can sell. Buy low sell high.” - Elon Musk

Elon even paraphrased Warren Buffett: Imagine you’re living in your house and some crazy manic depressive guy comes and stands outside your house and yells property prices at you. It’s a different price every day, but the house is still the same house. This is the stock market.

Conclusion

I close with 2 quotes and my key takeaways.

“You see a lot of AI companies doing LLMs and what not. If they’re so great, why can’t they make a self driving car? Because it’s harder.” - Elon Musk

“I see a path to a 5x or 10x increase in the value of the company.” - Elon Musk

Tesla will continue to maximize production with a focus on cutting costs. Their focus on efficiency and a calculated long term outlook will make the 5-10x share price Elon forecasted possible.

I believe Tesla is a generational buy. Short term you can sure expect a lot of manic depressive stock price behavior, tis the way the stock market works. The stock is already tanking in after hours, post earnings. It will definitely be a bumpy ride, but 2030 is looking awfully bright.

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