Does Tesla’s Move To License FSD Make The Stock More Attractive?

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Tesla (NASDAQ:TSLA) published a better-than-expected set of Q2 2023 results on Wednesday. However, Tesla stock fell by almost 10% in Thursday’s trading, as margins fell short of expectations, with Tesla also indicating that Q3 production could cool due to some summer shutdowns for factory upgrades. While revenues rose by 47% versus last year to $24.9 billion driven by expanding deliveries, adjusted earnings stood at $0.91 per share, up from $0.76 in the year-ago period. Deliveries grew by 83% year-over-year to 466,140 units driven by price cuts on Tesla’s most popular models. Now, the lower average selling prices are weighing on Tesla’s margins. For Q2, gross margins stood at 18.2%, down from 25% in the year-ago quarter, while operating profit margins came in at 9.6%, compared to above 14% in the year-ago quarter. Although this is concerning for investors, Tesla still remains the EV industry leader in terms of automotive gross margins.

There were positive developments, as well. For one, Tesla indicated that it was having discussions with one major auto company about licensing its full self-driving (FSD) technology. This could not only open up potentially high-margin revenue streams for the company, but also help Tesla gather more data to further improve its algorithms. This indicated that Tesla has been increasingly willing to share its technology. Last year, the company open-sourced its EV charging system, now dubbed the North American Charging Standard (NACS). Major automakers including Ford, General Motors, and Mercedes-Benz have announced that they intend to equip future vehicles with NACS charging inlets.

We currently remain neutral on Tesla stock, with a $263 price estimate, which is roughly in line with the current market price. We continue to believe that Tesla will remain a big beneficiary of the long-term transition to electric vehicles given its well-oiled supply chain, superior electric drivetrains, and its lead with software and self-driving technology. However, Tesla stock has already gained over 2x year-to-date and presently trades at 75x forward consensus earnings, which is slightly high, in our view. Tesla’s earnings for 2023 are also projected to decline year-over-year as automotive margins face pressure.  See our analysis on Tesla ValuationIs TSLA Stock Expensive Or Cheap? for more details on Tesla’s valuation and how it compares with peers. For more information on Tesla’s business model and revenue trends, check out our dashboard on Tesla RevenueHow Does TSLA Make Money?

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What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

 Returns Jul 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 TSLA Return 0% 113% 1745%
 S&P 500 Return 2% 18% 103%
 Trefis Multi-Strategy Portfolio 6% 26% 305%

[1] Month-to-date and year-to-date as of 7/21/2023
[2] Cumulative total returns since the end of 2016

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