Tesla faces bumpy ride after recent results. Can AI drive its recovery?

What happened?

Tesla’s share price has been extremely bumpy journey of late.

There were periods of sharp declines between Nov 2022 to Jan 2023, before its staging a strong recovery in the early part of 2023. 

Tesla’s share price fell sharply after releasing its 3Q23 results, declining by 15% in a single week. 

At the same time, Tesla bulls believe that its supercomputing training system “Dojo” will open up significant new possibilities for the company beyond electric vehicles.

Let’s explore if Tesla’s share price weakness is a window of opportunity for investors, and if artificial intelligence (AI) can change the company’s prospects. 

What are investor concerns for Tesla?

#1 Production issues 

Tesla produced 430,488 electric vehicles in the third quarter of 2023, a decline from 479,700 units in the second quarter. 

Tesla had attributed the fall to production issues as they retrofitted factories in US and China to upgrade assembly lines.

However, Tesla maintained its full year production target of 1.8m units for 2023. This would require Tesla to produce 449,00 units in 4Q23 to meet its target. 

There is a risk that Tesla might miss that the target they have communicated to the shareholders, if the production issues persist beyond the third quarter.

#2 Margin decline due to pricing pressure

Tesla’s profitability is coming under pressure as well. 

Its gross margin declined to 17.9% in the third quarter of 2023 from 18.2% in the second quarter.

Compared to the third quarter of 2022 where gross margin was 25.1%, the decline in margin is even more pronounced.  

The margin pressure is a result of Tesla’s decision to cut prices for its electric vehicles with slowing demand and competition from other electric vehicle makers, such as China’s BYD. 

Tesla’s CEO Elon Musk expressed concerns that the persistent high interest rate could start to impact consumers’ demand for cars as most car buyers take up loans to finance their car purchases. 

This has made investors even more nervous about the near term prospects of Tesla.

#3 - Delay of Cybertruck

Tesla earlier announced its plans to produce Cybertruck, an electric powered pickup truck. 

The Cybertruck was intended to be a challenger to Rivian’s R1T and Ford’s F150. 

It will also further broaden Tesla’s product models, and allow Tesla to enter into a new segment for future growth. 

The bad news is that Tesla has recently toned down its expectations of Cybertruck. Elon Musk noted challenges relating to ramping up production and making the Cybertruck business cash flow positive.

Currently, Tesla is profitable with its production of sedans. 

However, there are now concerns about the how potential losses for Cybertruck could impact Tesla’s overall profitability. 

Cybertruck may lead to a cash burn as Tesla ramps up production, weighing on the company even as demand slows for Tesla’s core sedan business. 

What are the long-term opportunities for Tesla?

Despite the near term headwinds, there are some bright spots for Tesla. 

These would include potential growth opportunities for its supercomputing system and charging network.

#1 - Beyond manufacturing EV – Tesla’s Supercomputing System

2023 technology world is all about artificial intelligence (AI) and Nvidia, and Tesla seems to have something similar to what Nvidia is offering. 

Tesla first unveiled its supercomputing training system “Dojo” in 2019. 

Dojo is a supercomputer designed and manufactured inhouse by Tesla to train Tesla’s machine learning models to improve its vehicles’ self driving and sensing capabilities. 

And this is done without using Nvidia GPU-based supercomputer!

Tesla has since started to produce its own Dojo training computer for its fleet of autonomous vehicles. 

While in its early days, Tesla’s Dojo system could be the gold standard for AI supercomputing in the electric vehicle industry.

One could start to think about Tesla as being a semiconductor and AI company, and not as a pure automaker. 

Just look at what Nvidia has done with its AI chips in 2023!

#2 - Beyond manufacturing EV – Charging Network

Beyond manufacturing EVs, Tesla also has the world’s largest global, fast charging network in the world with 50,000+ Superchargers. 

It is important to note that compared to traditional cars, EV makers have different charge ports. 

This is set to change in the US, as major automakers will be adopting Tesla’s proprietary North American Charging Standard (NACS).

NACS is widely considered to be the gold standard of charge ports. 

Even Tesla’s EV competitors such as Fisker, BMW, Toyota, Ford, Polestar and Rivian have announced plans to adopt NACS as the standard for their vehicles in US.

This could be a massive business opportunity for Tesla as its charging network may replace gas stations in the future. In addition, EVs produced by other manufacturers can also be charged in Tesla’s Supercharger network.

What Would Beansprout Do?

The recent challenges of production issues and margin pressure faced by Tesla post its 3Q23 results have led to its sharp pullback of its share price. 

These issues are unlikely to abate soon as US consumers continue to face higher financing cost, impacting their consumption habits. 

We would be monitoring if Tesla margins start to stabilize.

In the long term, there is potential for Tesla to grow its supercomputing system and charging network.

With the mixed outlook, we were not surprised to see that most analysts have a Hold rating on Tesla with an average price target of $228 per share as of 27 October 2023. 

This would be about +11% above its share price of $206 as of 26 October 2023. 

However, there is a wide range of expected outcomes for Tesla, with the bull case scenario price target at $380 and the bear case price target at $24.

It would seem like investors in Tesla should not be faint hearted and have the ability to stomach some near term volatility. 

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