This EV juggernaut is still a long-term buy despite the recent miss, says Munro Partners

One of the world’s largest electric vehicle producers, Tesla (NASDAQ: TSLA), announced US$21.45 billion in revenue for the September quarter, behind analyst expectations for US$21.96 billion. On the back of what is technically a miss, the share price pulled back around 6% on Wednesday.

But Munro Partners portfolio manager Jeremy Gibson believes this is an overreaction that ignores what he regards as positive news amidst a mixed set of results for the EV company.

Tesla (NASDAQ: TSLA) FY22 Q3 key results

• Net revenue of US$21.45 billion
  
• Net earnings of US$3.3 billion
  
• EPS of US$0.95

In one sentence, what was the key takeaway from this result?

Despite the slight miss in revenue, earnings and free cash flow came in above expectations. “For these higher multiple growth stocks, there can’t be any wrinkle in the story, so that’s why the share price was down 6% after the market close,” says Munro’s Jeremy Gibson.

He attributes this result mainly to the declining annual vehicle output. Tesla had been targeting annual production growth of 50%, a figure that was decreased slightly in management’s new guidance. In the September quarter, they missed expectations by 4%.

What was the market’s reaction to this result? In your view, was it an overreaction, an under reaction or appropriate?

Gibson regards the share price reaction as overdone, particularly given that management already reported the quarterly production earlier this month. He emphasises Tesla’s new manufacturing strategy, where the production of vehicles will be more localised for each individual market.

“European vehicles will be produced in Europe, Chinese in China and those for the US in the US. They’re just having some problems with the local logistics partners, so having more cars in transit is the main reason for the miss in deliveries.”

“The key for us is that the miss on deliveries is not demand related,” he says.
“That’s a teething problem, not a structural problem as they move through this different delivery model, so we think 6% down is an overreaction.”

Were there any major surprises in this result that you think investors should be aware of?

"Tesla had good free cash flow generation despite this slightly higher in-transit inventory at the quarter end," Gibson says.

This came in at $3.3 billion versus the consensus forecast of $2.3 billion, “usually you’d say that was pretty positive.”

Among other positive surprises in the result was management’s announcement of a potential buyback of between $5 billion and $10 billion in 2023, pending board approval.

“A company growing at this rate and at this scale is quite unheard of, and then to be doing buybacks seems extraordinary. That was probably the major surprise in the result.”

Would you buy, hold or sell Tesla on the back of these results?

On the back of this result, Gibson regards Tesla as a Buy, with nothing in the quarterly earnings announcement changing his long-term thesis on the company.

“They’ve been executing very well on ramping up production, particularly relative to their legacy peers and even next-gen peers, and they’ll get through these logistics challenges,” he says.

Gibson emphasises his view that Tesla is outperforming its peers in the way it’s grappling with the old-world supply chain and other logistical challenges it faces. He’s also buoyed by the work management is doing in making Tesla’s production processes more efficient.

What’s your outlook on Tesla and its sector over FY23? Are there any risks to this company and its sector that investors should be aware of?

Across the electric vehicle industry more broadly, Gibson and his team are positive on the long-term outlook. “We think we’re at the inflection point of adoption for EVs but obviously, there are some risks around that.”

One of these is the high-cost nature of new vehicles, which for most consumers are the second-biggest purchase behind only housing costs. This risk is heightened by the rising threat of a recession in the first half of 2023, which in turn poses a risk to the overall automotive sector.

“But we think EVs will grow strongly because of that adoption curve. And in terms of Tesla specifically, with that regional production model we mentioned, the key risk is simply in executing on that,” Gibson says.

The other obvious risk is that demand for EVs could take a hit from the consumer slowdown.

At the same time, these are offset by the regulatory responses in various markets, where traditional internal combustion engine vehicles are being mandatorily phased out in the years ahead.

“That’s one of the two main reasons why we’re positive on EVs and also because penetration is so low. Anyone buying a new car today, particularly in those markets where you’ve got an incentive to do so, consumers are going to consider an EV – even in Australia where they’re more expensive,” Gibson says.

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