Tesla & Netflix Q2 Earnings Reviews

Digesting two large cap earnings reports.

Brad Freeman

Jul 20, 2023

We strongly encourage you to share this article far and wide if you find it valuable and feel inspired to do so. That’s how we grow.

a. Demand

Tesla reports its production and delivery numbers right after the end of the calendar quarter. These results were ahead of consensus by a few percent. In terms of revenue, Tesla beat consensus sell side estimates by 0.8%.

Demand Context:

Deliveries represented 97% of cars produced this quarter vs. 96% last quarter and 92% 2 quarters ago.
60.3% 3-year revenue CAGR compares to 57.2% Q/Q and 48.6% 2 quarters ago.

b. Margins

Missed GAAP EBIT estimates by 13%.
Beat $0.68 GAAP EPS estimates by $0.10.
Missed 18.9% GAAP gross margin (GPM) estimates by 70 basis points (bps).
Missed 18.2% auto GPM estimates ex-credits by 10 bps. Some data sources had 18% consensus estimates so we can call this wildly important metric for Tesla roughly in line with expectations.
Sharply missed $2.8 billion free cash flow (FCF) estimates by $1.8 billion. Capital Expenditures (CapEx) rose by 19% Y/Y.

Margin Context:

Tesla’s strategy has recently shifted to rationally maximizing production and deliveries. It wants to take advantage of its input cost leads (depicted in the graph below) over competitors to grow share as rapidly as possible. For context, most legacy automakers have EV programs running at negative gross margins (the image shows overall margins). This is the time for Tesla to distance itself from the competition and this is how it’s trying to do so. It’s willing to make sales at lower gross margins because of this and thinks it can “harvest more margin” over time with technology up-sells. The falling GPM was fully expected and makes it tougher to compete with for legacy brands. That’s the present philosophy.

For the quarter, EBIT margin headwinds included:

Reduced selling price via mix shift and price cuts.
Its 4680 battery cell production still ramping (which will eventually be a margin tailwind).
More CyberTruck OpEx.
Austin and Berlin factories still ramping production capacity.

Some disinflation for raw materials helped offset some of this contraction. It enjoyed raw material disinflation in virtually every key area including lithium, steel and aluminum.

“Even with price reductions in Q1 and Q2, EBIT remained healthy reflecting cost reduction efforts, the Berlin and Texas ramps and strong performance of our Energy, Services and other businesses.” -- Shareholder Deck

With its first goal today being marketshare growth, this graph below offers evidence of its aim working:

c. Guidance

Tesla reiterated its general long term guidance. It expects a long term 50% volume CAGR which is incredible at this scale. It also has the cash on hand needed to fund investments while it re-committed to Cyber Truck deliveries in 2023. Finally, it expects software-powered margin expansion to kick in over time.

Elon told investors he thought “Full Self Driving (FSD) would be as good as a human driver” but the end of the year. He said he could be wrong and that regulatory clearance will take time too.

The team did not update its annual auto gross margin ex-credits floor this quarter. That implies it should be just below 20% as CFO Zach Kirkhorn told us last report that the floor slightly fell from 20% with price cuts.

Finally, Tesla continues to target 1.8 million 2023 deliveries. Q3 production will be down Q/Q a bit due to factory upgrades and will normalize thereafter.

d. Balance Sheet

Inventory levels are roughly flat Q/Q and rose 77% Y/Y.
$23 billion in cash & equivalents.
$2.3 billion in total debt with about 70% of it being current (due in next 12 months).
Share count rose very modestly at well under 1% Y/Y.

e. Shareholder Deck & Call Notes

Dojo:

Tesla development of the Dojo super computer is now underway. This is not another language learning model, but takes more of a video training approach to help Tesla pursue FSD. Dojo should “satisfy immense neural net training needs” to vertically integrate a large chunk of that technology for Tesla. The vertical integration simply cannot be matched by legacy auto makers and could form another edge. Importantly, it will use Dojo AND Nvidia for graphics processing unit (GPU) needs. To train AI algorithms and create utility-building use cases, companies need access to giant supplies of relevant data. Tesla leads peers here with its 300 million FSD test miles now driven.

Auto Business Context:

5,265 supercharger stations vs. 4,947 Q/Q and 3,971 Y/Y.
Still working on smoothening out deliveries throughout a given quarter to make in-period cash collection less lumpy.
The Berlin factory produced its first Model Y vehicles this quarter.
California, Nevada and Texas:
- Currently installing Cyber Truck equipment in the Austin factory for expected 2023 deliveries. Truck deliveries to sharply ramp in 2024.
- It continues to ramp production of its new lithium refinery in Texas.
Model Y is the best selling car in Europe year to date and was the best selling car globally in Q1 despite its higher price point vs. other top sellers.

Non-Auto Segments:

66 solar megawatts (MW) deployed vs. 67 Q/Q and 106 Y/Y.
- High cost of capital continues to hold back solar deployments across the sector.
3,653 megawatt hours (MWh) storage deployed vs. 3,889 Q/Q and 1,133 Y/Y. It’s ramping production of its first mega-pack factory in California as we speak which will come with a 40 gigawatt hour capacity.
- The storage segment saw meaningful margin expansion.

Licensing its Tech:

Elon pushed back against an analyst question about licensing Tesla's charging tech to competition. It’s not licensing the supercharger network, it’s merely opening it up for integration. Tesla views this as accelerating EV adoption and a large positive for its business. Very interestingly, Elon did say they’d explore licensing FSD software to competition. Tesla in early talks with a large OEM on this right now.

4680 Cell Battery Update:

4680 cell battery production rose 80% Q/Q while Tesla reduced its scrap bill by 40% Q/Q as manufacturing scales and processes mature. This resulted in input costs falling 25% Q/Q. For now, this is a large margin headwind. At scale, it will be a large margin tailwind due to lower costs and higher efficiency associated with the battery update.

Elon’s Charisma:

Elon has a magnetic personality. He’s smart, he’s witty and he’s often hilarious. He also never lacks confidence. When he says things like “we have a clear path to 5x or 10x market cap” or tells people to buy the dip when Tesla stock falls, investors should be keenly aware of this reality. He’s a historically successful businessman and someone who many rightfully look up to. But he’s a showman and is often wrong in his predictions -- as he’ll readily tell you.

f. Take

The quarter was as expected. Tesla is purely focused on taking share and growing production. Its large cost advantage over other EV programs is emboldening it to operate at lower up-front margins which makes it even tougher to compete with. As innocent bystanders, we think this is the right approach given ample software up-selling potential and its still comparatively healthy margins. It, however, could lead to more margin noise throughout 2023.

Long-Term Mindset is a FREE weekly newsletter emailed each Wednesday. Each issue contains five pieces of timeless content to encourage you to think long-term. All issues can be read in less than 1 minute. There’s a reason why we are consistent readers and think you should be too. Subscribe here.

2. Netflix Q2 2023 Earnings Review

a. Demand

Netflix missed $8.3 billion revenue estimates by 1.3% but roughly met its own revenue guidance. Last quarter, Netflix also told us that net subscriber adds for Q2 would be similar sequentially. It handsomely beat this implied 1.75 million subscriber guidance by about 4.1 million.