How Tesla Reaches Class Leading Financial Performance
April 2023
In my November 2021 article “Tesla’s Trillion Dollar Valuation – A Financial & Operational Analysis”, I dove into a series a financial metrics for Tesla and a selection of incumbent OEMs — Toyota, Volkswagen Group, GM and Daimler (now Mercedes Benz). In order to try and understand the gaps in financial performance, I analyzed the underlying operational parameters. Earlier that month, the pure EV player had reached its peak valuation at 1.2 trillion dollars.
Almost 18 months later, it is time to update this analysis. I decided to add Stellantis as another point of reference given the size and rather strong performance of the new transatlantic player. Tesla’s market cap has dropped by about half from its November 2021 peak. Yet, it still exceeds the cumulative valuation of the other five OEMs considered here by more than 30%. How can this be? Can operational differences explain such a gap?
Note: the following charts refers to the Jan-Dec 2022 period using the companies’ financial reports. Since Toyota’s fiscal year ends March 31, I reconstructed metrics for the same period using quarterly reports. For reference, the charts featured in the November 2021 article were based on the Jan-Sept 2021 period (9 months).
Tesla remains the smallest OEMs in the group with about half the volume of Mercedes, the second smallest, and 1/6 of Toyota’s or VW’s. Yet, 2022 deliveries grew 40% vs. 2021 to 1.3 million units. Sales in Q1 2023 equate to an annual rate of 1.6m units when analysts anticipate full year deliveries around 1.8m.
Distribution Model Delivers Higher Performance
Tesla stands amongst luxury brands thanks to its price positioning. Retail prices currently range from $42k to $105k in the USA. This follows multiple rounds of significant price drops in the recent months to keep demand going and put pressure on all the other OEMs putting new EVs on the market.
A major difference between Tesla and the incumbents is that the former’s retail price corresponds to revenue per vehicle thanks its direct-to-consumer (DTC) model. In 2022, revenue amounted to $54k per unit. By comparison, Mercedes’ revenue stood at $65k per unit even though the German OEM’s average retail price was $77k. All other OEMs in our sample generated $25k to $35k or revenue per unit, GM standing at the lowest level given how it consolidates low-priced EVs in China.
Tesla remains the smallest OEMs in the group with about half the volume of Mercedes, the second smallest, and 1/6 of Toyota’s or VW’s. Yet, 2022 deliveries grew 40% vs. 2021 to 1.3 million units. Sales in Q1 2023 equate to an annual rate of 1.6m units when analysts anticipate full year deliveries around 1.8m.
Distribution Model Delivers Higher Performance
Tesla stands amongst luxury brands thanks to its price positioning. Retail prices currently range from $42k to $105k in the USA. This follows multiple rounds of significant price drops in the recent months to keep demand going and put pressure on all the other OEMs putting new EVs on the market.
A major difference between Tesla and the incumbents is that the former’s retail price corresponds to revenue per vehicle thanks its direct-to-consumer (DTC) model. In 2022, revenue amounted to $54k per unit. By comparison, Mercedes’ revenue stood at $65k per unit even though the German OEM’s average retail price was $77k. All other OEMs in our sample generated $25k to $35k or revenue per unit, GM standing at the lowest level given how it consolidates low-priced EVs in China.
The DTC model has a direct impact on Tesla’s profitability as it brings the profit otherwise made with distributors and dealers in-house. For reference, Lithia, the largest distributors in the USA, generated $9.2k of gross margin (incl. financing and insurance) on each of the 311k new vehicles it sold in 2022. The DTC model also provides a direct relationship with buyers, a connection which becomes increasingly critical. One can easily understand why incumbent OEMs are working hard to replicate this model as much as local legal frameworks allow them to.
Operational Efficiency Across the Board
Tesla continues to demonstrate higher efficiency on several fronts including engineering and manufacturing. This leads to class leading gross margin at 28.5%.
Tesla’s range is limited to 4 vehicles built on two platforms, Model S being now 11 years old. Each model offers extremely high standardization and very few physical options: 5 body colors, 2 rims, a maximum of 3 interiors and 3 powertrains-battery pack combinations for each model as well as 2 steering wheels for Model S & X. Other options such as connectivity, ADAS (a.k.a. Full Self Driving) or rear heated seats are pre-installed and can be activated post-delivery via the app either as a subscription or a purchase.
The company is continuously improving its vehicle design. A good example is the mega casting Tesla introduced on Model Y at its new Berlin and Austin plants. The aluminum part replaces 70 mostly stamped parts that previously needed welding. The planned shift from a multi-module to a single pack, structural battery will also eliminate parts and simplify assembly. However, these changes will likely negatively impact reparability thus potentially insurance cost.
Moreover, the company has developed a deep expertise across all technical fields that are critical to EVs. These include battery technology, motors, power electronics and software. Vertical integration in these domains (except for manufacturing partners for batteries) leads to more optimal systems integration and better cost management.
Constrained SG&A
Tesla’s selling, general and administrative expenses are kept to a low level. Elon Musk indicated during the company’s last investor day that its SG&A stood roughly 60-70% below than those of traditional players and keep dropping.
Downstream efficiency is indeed truly optimized. The vehicle acquisition process is full online. Advertising is simply absent whereas incumbents each spend billions of dollars each year. Prices are non-negotiable. Fixed service centers are complemented with a fleet of vehicles that provide mobile service — I have experimented this very efficient model for the recall of a small wire harness, and I did not even have to be on-site. OTA updates are largely used to perform recalls when no hardware is involved.
This high efficiency leads to a very high operating margin 16.8%, approaching Porsche’s at 18.6%.
Net Income, Cash Flows and Market Cap
The performance highlighted above naturally translates into high net income at $9,500 per vehicle vs. Mercedes at $6,500 and mainstream incumbents at about $2k. Tesla’s lead is even more significant when considering net income as a percentage of sales where the pure EV player leads the group — even Mercedes — by a factor of 2x to 3x at 17.6%.
However, Tesla's high level of profitability will likely erode in the near term as the company has been dropping prices most likely faster than it has been able to reduce costs.
Such a performance also delivers cash. Tesla’s cashflows from operating activities reached $14.7b in 2022 or $11.2k per vehicle when VW, Stellantis, GM and Mercedes achieved between $2.7 and $3.4k per unit and Toyota obtained a dismal $300. This provides Tesla with the capability to continue expanding its manufacturing capacity, starting with a new plant in Mexico.
Finally, let’s consider market caps. As mentioned earlier, Tesla lost about half of its value since the $1.2b peak. In fact, all companies in our sample lost at least 20% of their value during the same period. VW’s market cap dropped about 50% vs. Nov 2021 and GM’s valuation shrunk 40%.
Tesla remains unique among the companies assessed here. It is the only pure EV player. It maintains a clear technical lead regarding batteries, motors, power electronics and software, all being areas where the company is vertically integrated. Tesla also has full control over its retail and service operations and is the unique interface with vehicle owners which grant the OEM troves of valuable data — though owners may not realize it. Finally, the company has been able to retain leading positions on fast growing EV markets, e.g., about 60% in the USA. This justifies a market cap bonus!
Marc Amblard
Managing Director, Orsay Consulting
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