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Tesla Slumps After First Results as a Blue Chip Disappoint

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Dana Hull and Gabrielle Coppola
·6 min read
Tesla Slumps After First Results as a Blue Chip Disappoint
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(Bloomberg) -- Tesla Inc. reported lower-than-expected profit and record revenue, mixed results that disappointed investors used to razzle-dazzle from the newly minted member of the S&P 500 Index.

The electric-vehicle market leader reported an adjusted fourth-quarter profit of 80 cents a share Wednesday, falling short of analysts’ consensus for $1.03 and well below the blowout result a year earlier -- before the global pandemic set in. The results marked a sixth straight profitable quarter but also the first time the company missed Wall Street’s estimate for earnings per share since July 2019.

Tesla shares pared an early drop of as much as 7.3% on Thursday, trading down 4.8% to $823.01 as of 9:51 a.m. in New York. The stock has soared more than 850% since the beginning of last year.

“Given the run in the name, an earnings ‘miss,’ no specific 2021 guidance and potential supply constraints, we could see the stock take a breather,” Joe Spak, an analyst at RBC Capital Markets, wrote in a report. “But, to long-term believers, there is likely little to deter their thinking.”

The Palo Alto, California-based company, which joined the S&P 500 last month, said operating margins shrank to 5.4% in the latest quarter, down from 9.2% the previous three months. It blamed price cutting in China, supply-chain costs and a big pay package for Chief Executive Officer Elon Musk and other executives.

“It was a mixed bag,” Gene Munster of Loup Ventures said in an interview, noting the dip in margins was accompanied by price reductions to win market share. “It’s negative for today but good for the long term, given the EV market is nascent.”

A ‘Noisy’ Quarter

The results capped Tesla’s first full-year profit. The company has defied skeptics by achieving sustained growth and been rewarded with an $819 billion market capitalization, dwarfing other carmakers. Its success has helped spur a rally in shares of other companies with lofty EV strategies, both old and new.

“2020 was a defining year for us on many levels,” Musk said on the quarterly earnings call. “We delivered almost as many cars last year as we have produced in our entire history, really an incredible growth rate despite a very challenging 2020.”

Tesla did not give a specific number for how many cars it expects to deliver in 2021, but said that it anticipates beating last year’s 50% growth rate, which would require handing over roughly 750,000 vehicles. It delivered almost 500,000 globally in 2020.

But that growth is coming at a cost. Tesla said the average selling price of its vehicles in the fourth quarter was 11% less than a year ago. That compares with a 3.1% gain in average transaction prices for all new vehicles sold in the U.S. last year to a record $36,786, according to market researcher TrueCar.

Musk has said he would be willing to sacrifice profitability to sell more and cheaper cars. But the CEO warned employees in an internal email last month that Tesla’s shares could get “crushed” if investors start to worry about its ability to deliver on profit expectations.

Chief Financial Officer Zachary Kirkhorn indicated the “noisy” quarter -- due in part to higher executive compensation tied to the rally in Tesla’s shares -- was more of an anomaly than the new normal. “Operating margin will continue to grow and remain industry leading,” he said on the call.

Credit-Fueled Revenue

Tesla’s revenue hit $10.74 billion in the quarter, surpassing analysts’ estimate for $10.38 billion and up from $7.38 billion in the year-earlier period.

The company earns money by selling regulatory credits to automakers that need them to comply with carbon-emissions standards in the U.S., Europe and elsewhere. Investors view this revenue as a double-edged sword because they want to know Tesla can be profitable from its core business: making and selling cars. Sales of regulatory credits rose to $401 million in the last three months of the year, from $397 million in the third quarter.

Tesla did not specify its supply-chain cost issues, but Kirkhorn said the company is working “extremely hard” to mitigate the impacts of a global semiconductor shortage.

Read More: Carmakers Face $61 Billion Sales Hit From Pandemic Chip Shortage

Tesla’s surging market valuation allowed it to raise cash repeatedly last year and accrue what Musk has called a “war chest” for investment in new factories and battery technology. The automaker is building two assembly plants in Germany and Austin, Texas, which will dramatically increase its production capacity.

Kirkhorn said Tesla can now afford to expand to meet expected demand in a way it hasn’t been able to previously. “This is an important point on capital efficiency that we haven’t had the luxury to do in the past,” he said.

Battery Supply Bottleneck

Tesla has been upgrading its factory in Fremont, California, to launch refreshed versions of its S and X models with new powertrains and interiors. A photo in the shareholder letter shows a small screen for passengers in the back seat. The first deliveries of the Model S began in 2012, and speculation about a refresh has circulated for months.

While Musk has promised to launch a $25,000 model by 2023, he’s not ceding ground on high-margin luxury cars. Tesla said a “Plaid” version of its flagship S sedan will go on sale next month, followed by the updated Model X in April. The company claims the high-performance version of the S will the fastest-accelerating car in the world, beating out the Porsche 918 Spyder and Bugatti Chiron.

The much-anticipated Cybertruck pickup is on track to debut later this year, but Musk said high-volume production won’t begin until 2022. He also said Tesla plans to join others racing to build electric vans but cautioned that battery-supply constraints will force the company to pace its debuts of new vehicles.

“We will take as many batteries as they can produce,” the CEO said, mentioning leading suppliers such as Panasonic Corp., LG Chem Ltd. and Contemporary Amperex Technology Co. Ltd. “We urge them to increase their production, and we will buy as much as they can send to us.”

(Updates with opening shares Thursday in third paragraph. An earlier version corrected the title of Kirkhorn in 12th paragraph.)

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