If you find these reviews valuable, please share them far & wide with your networks. That is how we grow, and it would mean a lot.
If you’re new to Stock Market Nerd, this is the kind of quality content that you can consistently expect. If you’re willing to pay $0 a month for institutional-grade research on 50 popular companies and macro, subscribe below:
1. Tesla (TSLA) — Q4 Earnings Review
Tesla needs no introduction.
a. Demand
Tesla missed revenue estimates by 2.2%. Its 33.0% 3-year revenue compounded annual growth rate (CAGR) compares to 38.7% as of last quarter and 60.3% 2 quarters ago.
b. Margins
Missed EBIT (means earnings before interest & tax or just operating income) by 9.1%.
Missed $0.74 earnings per share (EPS) estimates by $0.03.
Missed 18.1% GAAP gross profit margin (GPM) estimates by 50 basis points (bps; 1 bps = 0.01%).
Beat the 15.7% auto GPM ex-regulatory credits margin estimate by 150 bps.
Formula: ((Auto revenue + auto leasing) - (auto cost of revenue + auto leasing cost of revenue)) / (Auto revenue + auto leasing)
GAAP EPS was heavily influenced by a roughly $6 billion tax benefit, so it is not a relevant metric for this quarter.
c. Balance Sheet
$29 billion in cash & equivalents.
$5 billion in debt.
Share count rose by 0.5% Y/Y.
Global vehicle inventory days in supply rose from 13 days to 15 days Y/Y. Inventory overall rose by 6.1% Y/Y.
d. Guidance
Tesla told us that volume growth for its auto business in 2024 would be “notably lower” vs. 2023. It guided to $10 billion in capital expenditures as well representing 12.3% Y/Y growth.
Tesla trades for 57x next 12 month (NTM) EBIT, 55x NTM FCF and 61x NTM earnings. EBIT, FCF and earnings are set to grow Y/Y by 49%, 55% and 44% respectively in 2024.
e. Call & Release Highlights
Bears say vs. Bulls say:
Tesla’s margin trajectory has been the topic of fascinating debate over the last year+. Bulls will say that Tesla is intentionally cutting some vehicle costs to make them even harder to compete with amid a higher cost of capital environment. Tesla’s unmatched margin profile (both gross & net vs. all other EV programs) gives it the flexibility to profitably lean into consumer affordability. After all, higher rates mean higher interest payments and so more expensive cars (all else equal). Optimists here will tell you Tesla is controlling its average selling price to counteract this reality for its consumers. They say that Tesla is willing to accept lower up-front margins today as it knows there are software up-sells coming in the future (like hopefully Full Self Driving (FSD)) to “harvest more profits” over time. Leadership has said the same thing.
With tougher macro today, keeping selling prices low makes finding demand amid the not-so-fun part of this auto cycle tougher for others. Tesla is using its competitive positioning to amplify this pain for its competition. That should mean stronger Tesla market share over time as headwinds abate & growth likely re-accelerates. Again… that’s the bull case here. Not my opinion… but the opinion of many bright Tesla bulls.
Bears will say that Tesla is cutting costs and seeing margins tank due to intensifying competition across the sector. Especially in Europe and China, without the same tax benefits, skeptics simply think others are catching up, Tesla’s differentiation is shrinking and so its pricing power is too. That’s what they will tell you — regardless of market share trends. This is also not my opinion, but the opinion of many bright Tesla bears.
There’s likely truth to both of these arguments. 2024 will tell us a lot about who is right.
Margin Puts & Takes:
Tesla continues to cut input costs per vehicle. Specifically, costs fell Y/Y from a bit over $39,000 to just over $36,000 this quarter; it remains committed to consistently lowering this number over time. Input cost disinflation is helping a lot. Furthermore, cutting scrap bills from its newer 4680 cell battery as production scales is helping, while ramping capacity at its newer gigafactories is too.
Conversely, mix shift to lower price vehicles and a falling average price per vehicle are both margin headwinds today. Cybertruck costs are another headwind as the production line hasn’t yet ramped (but costs have). Finally, it continues to invest aggressively in AI and R&D to support its next-gen vehicle line-up. This, paired with weaker than normal sector demand, is hurting margins too.
“If rates fall quickly, margins will be good [in 2024] and if they don’t then margins won’t be good [in 2024].” — Elon
More Demand & Efficiency Metrics:
Model 3 & Y production rose 14% Y/Y while older lines saw production fall 12% Y/Y.
Super-charger stations and super-charger connectors rose 27% Y/Y and 29% Y/Y respectively.
Tesla reached a 2 million vehicle annual production run rate this past quarter. Its Fremont Factory in California is now the highest output plant in North America.
The China plant resumed normal production after pauses in Q3 for factory maintenance.
Model Y Production in Germany continued to ramp to full scale.
Advertising:
Tesla has begun to selectively advertise its brand to build awareness. It’s in the experimentation phase here.
90% of its 2023 buyers were brand new to Tesla. The opportunity for boosting brand awareness remains very large.
Car Updates & Launches:
Model Y was the best selling car in the world in 2023.
Its model 3 refresh is now complete. The upgraded vehicle looks similar, but with a quieter cabin and a longer range — among other improvements.
The Cybertruck will ramp production and deliveries throughout 2024.
Elon told us that “Tesla is between 2 growth waves.” It’s now investing heavily in its next generation vehicles to support longer term demand. Elon thinks the next generation vehicles will be ready to be shipped by the end of 2025. Importantly, production involves some of the most impactful manufacturing innovation in Tesla’s existence — per the team. It’s now working on proving out the potential profitability of this newer assembly technology. All of this must be done internally, as nobody else has the manufacturing capabilities to outsource and partner. Continued vertical integration is what makes Tesla so special and is also a risk.
Solar Business & Energy Storage:
Tesla’s solar business continues to sharply contract Y/Y and sequentially. Higher cost of capital make deployments much more expensive, which hits demand. This isn’t a massive deal for Tesla today given all of its other business drivers. For others in the space, like Enphase (ENPH), this understandable weakness should be closely paid attention to.
The energy storage business is faring better with 10% Y/Y revenue growth. Leadership sees growth here outpacing the auto business in 2024.
AI and Software:
“Tesla is an AI robotics company.” — Elon
FSD version 12 was released to some Tesla employees. It will be released to all other customers (400,000 of them) in the weeks ahead. This version is essentially brand new; it ripped out thousands of lines of C++ code to replace with neural networks. Elon calls this game “profoundly different end-to-end AI.”
“All automakers should be calling us to license FSD. That would be the smart move from them.” — Elon
The second general of its Optimus Robot is in the works. Elon thinks Tesla can ship Optimus Robots by next year. He calls this “the most important product ever.” He never lacks charisma.
Elon called Tesla the “most efficient AI inference company in the world.” This was as he reiterated his discomfort with growing Tesla to be a “robotics AI juggernaut” without roughly 25% voting control of the company. He doesn’t want more money from the company; he just wants proper voting control to fend off any future activists with “strange ideas.” He “wants enough to remain influential.” Maybe he shouldn’t have funded part of the Twitter purchase with his Tesla shares.
Finally, he called Tesla’s Dojo supercomputer project “a long shot with high risk and high potential reward.” This was less optimistic language than I’ve heard him use in past quarters.
f. Take
Tesla is clearly the global leader in electric vehicles based on both market share and profitability. That did not change in 2023. Still, energy storage, solar demand and the auto industry are all violently cyclical. Tesla has done better than most during this tougher part of the cycle, but it’s far from immune. Macro matters a lot for this secular AND cyclical grower. Its 2024 results will be heavily influenced by how those macro trends evolve. If your investing horizon is ideally several years, this matters a lot less than continued innovation and market share gains. If your horizon is a few quarters, this is a key item.
Was this a great quarter? No it was not. Should bulls or bears be taking victory laps? I don’t think so. Let’s see what this looks like as cost of capital falls and its battery/factory investments mature. I will closely watch from the sidelines.
Love this infographic?
My friend Carbon Finance sends out a weekly newsletter with simple, data-driven visuals that cover the most important headlines in investing.
The best part is that it’s completely free and only takes 5 minutes to read.
Join thousands of readers and subscribe here now.
2. Netflix (NFLX) – Q4 Earnings Review
Netflix needs no introduction.
a. Demand
Netflix beat revenue estimates and its revenue guidance by 1.4% each. This was attributed to some help from foreign exchange as well as outperforming member growth. Its 10% 3-year revenue compounded annual growth rate (CAGR) compares to 9.9% as of last quarter and 10% 2 quarters ago.
It also crushed net new subscriber estimates by 38% while beating its rough guidance by about 47%. The 13.1 million net new subscribers represents a new record and compares to 7.7 million in the Y/Y period. Average revenue per member (ARM) growth of 1% Y/Y was in line with its guidance.
b. Margins
Netflix beat GAAP EBIT estimates by 23% & beat free cash flow estimates by 29.5%. Conversely, it missed $2.23 GAAP EPS estimates by $0.12. This was entirely driven by a $239 million non-cash charge from FX losses. It would have beaten estimates by $0.41 without this charge.
c. Balance Sheet
$7.1 billion in cash & equivalents
$14.1 billion in long term debt.
Diluted and basic share counts both fell by more than 1% Y/Y due to buybacks. It bought back about $6 billion in stock in 2023. It has $8.4 billion left in buybacks under the current plan.
It has $400 million in convertible senior notes maturing in Q1, which it plans to pay off with its existing cash pile.
d. Guidance
Q1:
Netflix revenue guidance just barely missed consensus estimates. Its 13% Y/Y growth guide includes a 300 bps headwind from foreign exchange (mainly due to Argentina).
Paid subscribers will rise by more than 1.8 million in Q1.
ARM will be roughly flat Y/Y.
EBIT guidance beat estimates by 8%.
EPS guidance beat $4.10 estimates by $0.39.
2024:
“Expect healthy double digit revenue growth” for 2024. This is roughly in line with estimates calling for 13.5% Y/Y growth.
High single digit Y/Y % rise in content amortization based on recovering content spend post writer/actor strikes.
$6 billion in 2024 free cash flow. $17 billion in content spend vs. $13 billion in 2023.
Based on this, Netflix trades for roughly 27x next 12-month (NTM) EBIT, 32x NTM EPS and 33x NTM FCF. EBIT is expected to grow by 27% Y/Y in 2024; EPS is expected to grow by 33% Y/Y in 2024; FCF is expected to fall by 5% Y/Y in 2024 as it normalizes content spending.
e. Call & Letter Highlights
2023 in Review & 2024 Preview:
For the year, Netflix saw revenue growth accelerate from 6% Y/Y in 2022 to 12% Y/Y in 2023. This was helped mightily by far easier growth comps as we move further away from the pandemic pull-forward. Still, EBIT margin also sharply improved from 18% to 21% Y/Y for 2023 while it exponentially grew free cash flow to $6.9 billion vs. $1.6 billion Y/Y. Importantly, $13 billion in content spend (vs. $17 billion in 2022) due to the writer-actor strikes helped FCF generation. Still, that wasn’t the sole cause of the rapid growth as other cost controls and accelerating revenue both helped too. Netflix thinks the strikes only added $1 billion to 2023 FCF.
For 2024, Netflix has the following priorities:
Scale the advertising business.
Broaden the content offering with more games and live titles (like with the new WWE partnership).
Create more live experiences, like with its Stranger Things Play.
It’s just 5% saturated in its total addressable market with TV market share under 10% in all nations. There is plenty of runway left for more growth. It will look to content licensing (like the new WWE deal) and continued aggressive investment in home-grown IP to continue pursuing this growth. Notably, while it expects a lot more industry consolidation, it does not plan to take part in it and has no interest in acquiring linear assets.
New WWE Deal & Gaming (newer content categories):
Starting next year, Netflix will exclusively air WWE Raw content across North America and the UK. It will host all live and scripted content from the league as well. Netflix leadership sees this as a very under-distributed league that its reach can greatly help with. The economics of the deal were not disclosed, besides the team saying they were “super happy” with the terms. This was already part of the planned $17 billion in 2024 ad spend, and will become a key tool in the rapid scaling of its advertising branch.
Netflix was drawn to WWE representing the intersection of sports and drama/entertainment. It thinks this fits best within its current content niche and told investors that this news “does not represent a change in the live content strategy.”
Gaming engagement tripled Y/Y. Most of its success continues to come from licensing popular titles like Grand Theft Auto. It is enjoying traction from its highest quality IP like Stranger Things as well.
Streaming King:
Netflix boasted the top original TV series for 48 weeks, the top original film for 41 weeks and the top acquired series for 44 weeks in 2023. This data is per Nielson and not internal claims – making it far more legitimate. Its share of TV viewing hours in the UK and the USA is stable Y/Y at 9% and 8% respectively. In Mexico and Brazil, it moved from 4% to 5% Y/Y.
Advertising:
Netflix continues to enjoy explosive advertising growth from a still small base. Impressively, it has 23 million ad-supposed monthly active users vs. 15 million Q/Q and 5 million just 6 months ago. 40% of all new members opted into its ad-tier in the nations where it’s offered (vs. 30% last quarter) while it continues to sharpen targeting and measurement to provide more value to ad buyers. Still, advertising revenue is a small portion of overall results and will not become a primary growth driver until 2025.
The firm is phasing out its cheapest non-ad-supported tier in select markets like Canada and the UK in Q2 2024. Why? Because it wants to motivate users to select the ad tier where its revenue per member is actually higher. Despite ad load being very minimal on streaming platforms, granularity is unmatched. The always signed-in, programmatic nature of ad buying means that buyers can target two eyeballs in real time rather than two million people several months in advance. Netflix has complete and fully leverage-able customer data profiles to optimize relevance, which drives up the value of its impressions.
Advertising margins “remain very high” per the team.
Paid Sharing:
As a reminder, Netflix paused price hikes during the paid sharing rollout (as it views paid sharing as a different form of price hiking). With paid sharing mostly implemented today, it will get back to occasional price hikes like it did late in 2023. Growth was driven entirely by more subscribers in 2023. Netflix sees revenue per member contributing more normally to growth in 2024. Notably, this monetization optimization means Netflix can invest in more content to bolster the value proposition further.
Churn rate continues to outperform expectations amid the password sharing crackdown.
There are still more households where its paid sharing policy change has yet to be implemented. Most, but not all, have already been affected.
This hurts engagement per household metrics as Netflix allows fewer people to use the exact same account. More importantly, it’s a revenue tailwind.
f. Take
Netflix has re-discovered its groove & fundamental rhythm. It has successfully re-accelerated the top line while tightening its belt and delivering compelling margin expansion. While 2023 was a weird year via password sharing crackdowns, strikes and an advertising debut, 2024 should look a lot more normal. It’s gearing up to lean heavily into content spending across scripted, live and gaming; it has the cash flow and balance sheet to fully support that objective. This is the streaming king and Q4 did nothing to change that reality. Congrats to shareholders on another wonderful quarter.
Outstanding writeups. Fav part - "Take".
Thank you!