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Tesla had ‘a good quarter on a relative basis’ while still being overvalued: Analyst

ROTH Capital Partners Senior Research Analyst Craig Irwin joins Yahoo Finance Live to discuss Tesla fourth-quarter earnings, the stock's valuation, and how Elon Musk is balancing running the EV maker as well as Twitter.

Video Transcript

- The margins we're really waiting for is probably Q1 '23 story because we want to see what the impact was of the price cuts, both in China and most specifically in here, between 7% and 20% price cut. And there were three price cuts this year on the primary Tesla models. But again, to Jared's point, the gross margin is 25.9%, well short of the estimates and probably going to get much worse ahead.

- Yeah. Certainly. I think a lot of the reaction that we are seeing in the stock-- actually, right now, we are back in negative territory. So flipping between gains and losses here following these results as investors kind of digest the numbers that we are getting.

But I think the positive point here that they remain ahead of that long term 50% growth target here for deliveries of 1.8 million cars in 2023. That is a huge headline year coming out of Tesla. But when you take a look at that revenue number, a slight miss there from the company. $24.3 billion. The Street was looking for $24.67 billion gross margin number. 25.9%. That missed the Street's estimates of just above 28%. That's a bit worrisome here for the company.

Cyber Truck, Tesla saying that it is on track to begin production this year, also saying that they have enough liquidity to fund a product roadmap here going forward. Let's talk about this, what this means for Tesla. We want to bring in Craig Irwin, Roth Capital Partners senior research analyst. Craig, it's great to see you again. I know you've only had a couple of minutes here to look at these results. But what do you think?

CRAIG IRWIN: So, optically, top line, bottom line ahead, margin miss is not a surprise. The different contributions to gross margin we really need to pick out are the 467 million in credits. That is a very heavy credit contribution in the quarter.

Also, we want to see the deferred revenue recognized in the quarter. That we have not found yet. But that's I understand going to be a fairly chunky contribution given some of the features of FSD that have been rolled out to all the customers that are now using or subscribers to FSD. So that should be a pretty chunky gross margin contribution. Really, what's going to determine the direction of the stock tomorrow is going to be margins for the year. The price cuts of more than 13% are pretty dramatic.

And I expect they're going to be conservative tonight on what they say about pricing. Once you've taken some cuts, you could very easily take more, particularly when, what do we have, something like 90 new EV models coming to market this year. We're going to have 500 globally by the end of 2025. Tesla does face some significant competition and share erosion. And that does not create a margin accommodative environment. So we're still bearish. This was a good quarter for them on a relative basis. 40% growth for the year is still fantastic. But we just think Tesla is overvalued and there's better places to invest.

- And let's talk a little bit more about those price cuts. Initially, heavily criticized by analysts, who then swung around and seem to be complimentary of them as we saw demand spike across North America and in China. Where are you at on the price cuts today? A net win?

CRAIG IRWIN: Price cuts were the right thing for them to do. I mean, they absolutely did need to bring the pricing down such that their customers can qualify for the IRA subsidies. That was essential. So it was the right thing to do. It's just going to hurt-- it's going to hurt margins. It's going to hurt the P&L. And it's going to hurt the longer term earnings outlook. I mean, there's a long tail to margin erosion. And when you're cutting price, it makes it harder to raise price.

They are the leader in the market. So it's possible we could see them raise prices a little bit. They did raise prices in China by about 500 bucks within the last week as inventory came in line. But I'm a believer that we're going to see continued price pressure as overall share pressure is an issue with many successful alternatives coming to the market.

- Well, Craig, here we are today. Tesla just around a two-year low. You talk about some of those downside risks. How much more pressure do you think we could see on the stock?

CRAIG IRWIN: So my price target's 85. I've believed for a long time-- I've kept that about two years. I've believed for a long time that Tesla should not be valued more than Toyota. I don't think there's anything that Tesla has that Toyota does not. Toyota did something like 9 million cars last year. Tesla, 1.4. Fantastic. But on a relative basis, I think people need to be careful. There's great names in EVs. Tesla is a great name in EVs. But I think the money is more easily made elsewhere.

- And of course, when you talk Toyota, Craig, they're worth almost twice what Toyota is. Tesla currently worth $453 billion in their market cap. And for perspective, GM and Ford are each worth just over $50 billion in market cap. Is Tesla simply a car company? Or are they something else from your perspective?

CRAIG IRWIN: So Tesla's an EV company. And EVs are cars. A lot of people try and dress this up as some technology story. Reality is the auto OEMs are actually pretty sophisticated around technology. And batteries. Tesla doesn't have anything in batteries that the others don't. People like to talk about this 4680 cell that's cutting in. It's a solvent-free production. It came from the Maxwell Technologies acquisition. Actually, the key technology in there is the coder technology that comes from Saueressig in Germany, which is owned by Matthews Corp. That's open source. Guys in Japan have bought their coders. People in Germany have bought their coders.

The 4680 is not all that proprietary. Other people have the same technology. If they're really so special in batteries, why are they buying from Chinese OEMs? They're not. Tesla's a great company with a great brand that's pushed hard. And you're seeing other leading brands push into this market aggressively. Volkswagen. It's just going to be a couple of years and they should be quite a bit larger than Tesla in EVs. And that's not the only name.

- And Craig, if Musk is on the call, I'm sure I'm sure he will face some questions about Twitter. We haven't even brought that up yet, just in terms of how big of a distraction that is, how much time he's spending there versus how much time he's spending at Tesla. How big of an overhang do you still see that story being to the stock?

CRAIG IRWIN: Oh, man. That's a tough one. I mean, Twitter really is a boat anchor. It's something he probably wishes he never bought. He probably was a little bit tongue in cheek when he made his original bid public. I think he probably views that as just a freaking boat anchor. And now he's going to go out there and fix it. Best scenario for him is if he could get someone like Jack Dorsey to come back. Jack's got a billion dollars rolled into it in stock.

If he could persuade him to come back and win back those 80 advertisers that have left, that would be a huge deal for Tesla. It would probably pop the stock 25 to 50 bucks. The reality, though, is I think that there's enough of a challenge to bring someone like Dick Costolo or Jack Dorsey back and they'll have to look elsewhere for more credible leadership given that Musk has said he's going to depart. He's going to go and focus back on SpaceX and Tesla and Neuralink and all the other fun projects he has going on.

- Yes. The monkeys. You got to focus on the monkeys. Craig, there's probably a dozen questions for the call. If you had just one and Elon had to answer it, what is it?

CRAIG IRWIN: Oh, man. What would stop you from taking more price cuts this year? And how would you balance price versus unit guidance for the year? Which one is more important for you?

- All right. That would be a good question. Hopefully, you'll get to ask it. Craig Irwin, thanks so much.