Musk Bullish On Tesla Sales Growth

Tesla’s earnings report was initially received with a shrug of the shoulders. Then Elon Musk took charge of the post earnings call and the market liked what it heard. Tesla’s trading roughly +7% in pre-market.

"So if it's a smooth year, we actually have the potential to do 2 million cars this year. We're not committing to that, but I'm just saying that's the potential"

Maybe that’s the quote that’s got markets thinking positively about the electric vehicle maker: There were plenty to choose from. The overriding theme was one of continued progress and increasing production.

Tesla’s official forecast is to increase production to 1.8 million vehicles this year, approximately 38% more than in 2022. Musk was keen to emphasise how well the firm had done in tough circumstances:

“Team did an amazing job. It's an honour, of course, to work with such an incredibly talented group of people. So in 2022, we delivered over 1.3 million cars and achieved a 17% operating margin, the highest among any volume carmaker, I think maybe among any carmaker. While doing so, we generated $12.5 billion in net income and $7.5 billion in free cash flow.”

It seems clear that the announced price cuts were an attempt at stimulating demand and maintaining/increasing market share. Musk is expecting a “pretty difficult recession this year”, and even though he sees contraction in the automotive industry, he’s backing Tesla to outperform.

Let the price war begin

It’s all about those profit margins. Tesla really has some margin to play with and hopes to benefit from economies of scale as production ramps up. On top of this, the company is looking to aggressively cut costs.

CFO Zach Kirkhorn summarised:

There are three key points I wanted to make here. First, on demand, as Elon mentioned, customer interest in our products remains high. Second, on cost reduction, we're holding steady on our plans to rapidly increase volume while improving overhead efficiency, which is the most effective method to retain strength in our operating margins. In particular, we're accelerating improvements in our new factories in Austin, Berlin and in-house cells, where inefficiencies are the highest.

But we are attacking every other area of cost and unwinding cost increases created for multiple years of COVID-related instability. This includes logistics, expedites, accumulation of material buffers, part premiums, productivity and overheads as an example. As the world transitions from an inflationary to deflationary environment, we expect a strong partnership with our suppliers on this journey as well. In that, we've priced our products with a view toward a longer-term cost structure.

This is a bold move. Essentially the company is gambling that we’re moving towards a more deflationary world and cutting their prices in anticipation. Overall, the hope is that the business will become more efficient as it scales, input costs fall too, and a little margin sacrifice in the present will ensure that competitors struggle to keep pace with the EV leader into the future.

The higher sales volumes will hopefully compensate for the lower margins per vehicle. If it comes off, Musk and the Tesla gang will be very happy. What it means for the share price is anyone’s guess. Tesla is still a $450 billion dollar company according to current market valuations.

If the recession is as severe as Musk suggests, we could yet see the strange combination of the company growing and improving even as the share price falls.