You wouldn’t know it from all the times I criticized him last year, but I have a hard time criticizing Elon Musk.
Musk is a lot of things, many of them distasteful. He’s petulant, petty and proud to be both. He’s also a political provocateur now. For years, he made a habit of snubbing securities regulators, implicitly suggesting he was above the law. We’re supposed to look over all of that (and plenty more) because he’s a genius, but some very smart people question his genius, just like some engineers question if he’s an engineer. And so on.
But the inescapable reality is that Musk has done some fairly incredible things. He revolutionized the automobile, for example. (You might argue “revolutionize” overstates the case, but you know what I mean.) He also builds rocket ships. And tunnels. And brain implants. And, although I don’t believe money should be the yard stick for measuring a man’s worth, if it were, Musk was worth $340 billion on paper in November of 2021.
I’ll never revolutionize human transportation. Nor will I ever build rocket ships. Importantly, I don’t believe I was ever capable of doing such things nor, apparently, was anyone else — or at least not of doing them all at the same time. You might fairly argue that Musk doesn’t do any of these things personally, let alone singlehandedly, or even that he doesn’t actually know that much about all the technology and science he relies on. But you could say that about pretty much every CEO. Can Mary Barra build a whole Chevy by herself? Maybe. I doubt it, though. And she started at GM when she was 18 years old.
Musk is different than other rich, successful people. Or at least that’s how I tend to view him. I don’t think I could necessary be Jamie Dimon himself, but given the ample opportunities afforded me as a teenager and young adult, I’m reasonably confident that had I made it my life goal to become an executive at a bank, I could’ve climbed fairly high up the ladder. Maybe I wouldn’t have landed in the C-suite, but the point is, I’d be closer to Dimon had I set out to be a bank CEO than I’d be to Musk had I set out to be whatever Musk is.
It’s with that in mind that I’ll eschew the temptation to revel in Tesla’s Q1 margin compression in favor of a simple, obligatory earnings recap. I’ve made no secret of my disdain for Musk’s decision to crown himself right-wing libertarian standard-bearer, and for all his — I don’t know what to call it — Muskness, he’s plainly struggling to run Twitter, unless you mean run it into the ground, in which case things are going swimmingly. But Tesla has proven critics wrong time and again, and SpaceX is in the process of test-flying Starship.
As alluded to above, one concern around Tesla is now margin contraction. Operating margins compressed nearly 800bps YoY in Q1, according to results released Wednesday after the bell. They fell 460bps from Q4. That, as Musk aggressively cuts prices to boost sales. Conspicuously absent from the deck was Tesla’s automotive margin. On the call, CFO Zachary Kirkhorn said that both operating margin and automotive gross margin “remain at healthy levels.”
“In particular, automotive gross margin was impacted by a few factors since our discussion on the last earnings call, which include additional action taken in the second half of the quarter to improve vehicle pricing and one-time items, most notably warranty adjustments on older S and X vehicles as well as increased deferred revenue for certain Autopilot features as we transition technologies,” Kirkhorn went on. The deck said that, notwithstanding price reductions, “operating margins reduced at a manageable rate.”
I’ve never claimed any special knowledge around Tesla, but I do know that 779bps is a meaningful margin crunch. Profits contracted 24%. Overall revenue rose 24%, but the shares trade at something like 50x. Justifying that multiple in an environment where, as Tesla’s own management team mentioned repeatedly on Wednesday evening, macro uncertainty is pervasive, and where rates are 5%, is difficult. Musk has suggested on several occasions that the Fed should cut rates, including last month.
Deliveries hit another record in Q1. Asked on the call how global order intake has tracked since the most recent round of price cuts, Musk responded that “overall… orders are in excess of production.” Output is expected to match the company’s prior guidance in 2023, and deliveries should still come in around 1.8 million.
Pressed on whether there’s still upside to two million deliveries and if not, whether supply chain issues or demand is the bigger limiting factor, Musk told Goldman’s Mark Delaney that if he (Delaney) had a “crystal ball,” he (Musk) would like to borrow it.
It was the second time during the call that Musk declined to speculate on demand citing lack of access to fortune-telling devices. While responding to Canaccord’s George Gianarikas, Musk channeled Dimon’s storm metaphors. “Man, I wish I had a crystal ball to answer your question,” he said. “This is my guess. It’s just pure speculation. Stormy weather for about 12 months and then provided there are no major geopolitical wildcards that show up, things start getting sunny around spring next year.”
Shortly before the call, Musk threatened to sue Microsoft for allegedly training its AI on Twitter.
From 1Q22 to 1Q23, total revenue grew +24.4%, gross margin declined -820 bp (29.1% to 20.9%), gross profit declined -10.7%. Auto-only, auto revenue (units x asp) grew +21.6%, auto gross margin declined -950bp (30.0% to 20.5%), auto gross profit declined -16.9%. And revenue growth declined from +80% to, as noted, +24%.
On the numbers, TSLA is looking more like a normal car company as it grows. E.g. BMW (using 4Q22) grew total revenue +24% with gross margin 17.3% -220 bp. It also has a China problem, both competition and CCP.
Musk is now saying his plan is to ship as many cars as possible, even at low/no margin, to have a large installed base when full autonomy is achieved – which is, as usual, just around the corner. Presumably if the take rate for FSD is 80% instead of 10%, the software-like margins and maybe recurring revenue will make the hardware margin unimportant.
“You might fairly argue that…he doesn’t actually know all that much about the all technology and science he relies on. But you could say that much about every CEO.”
I had stopped trying to correct misconceptions about Musk after he bought Twitter because it was looking like he was the nutcase everyone thinks he is. But here I go again.
Musk does infact understand his technolgies to a mind boggling level. He is not just a “CEO”, (titles are meaningless – he’s declared often) he is also the freakin FOUNDER of all his companies – he has taken extreme risks using his small fortune made from Paypal to keep SpaceX and Tesla afloat in 2009.
— Watch this interview he gave at SpaceX last year and see if you think he understand the tech involved: https://www.youtube.com/watch?v=3Ux6B3bvO0w
Musk is a nerd’s nerd. He is immature and socialy kinda awakard like a nerd. He is an engineer to his core. He is able to absorb science and technology books like a vacume cleaner. He has a BS in Physics, and also one in Economics. He dropped out of the material science PhD at Stanford because the Internet boom called. And he DOES understand, to an astounding level, the science and technology he relies on. So much so he is known to micro-manage his engineers. Google “Musk first principles thinking” – he is a big proponent – it’s a methondolgy for designing anything by starting with the basic laws of physics. It’s what he does.
When he was in collage he felt the three things that would most affect the future of humanity were:
1. the internet
2. transitioning to a sustainable energy economy (energy produced AND used in a sustainable way)
3. space exploration
Here an interview from 2010:
It would be quite amazing if Musk was able to pull Twitter back from the edge. He’s done it before with SpaceX and Tesla. But there he was dealing with steel and litium and the laws of physics. With Twitter he’s dealing with human beings and psychology. I know he’s hating it.
You misquoted me. Here’s what I actually said:
“You might fairly argue that Musk doesn’t do any of these things personally, let alone singlehandedly, or even that he doesn’t actually know that much about all the technology and science he relies on.”
The “fairly” only applies to the “personally”/”singlehandedly” part. In this case, using the “…” turns my sentence into something it wasn’t. I was careful with that sentence for a reason.
You are right. I miss quoted you. Sorry.
I feel people love to tear down Musk and that makes me touchy. After calmly re-reading your article I see you are surprisingly accurate and fair in your analysis of him. Was there even some admiration there?
If only an EV revolution could save the planet. Or the Starship could make us an interplanetary species. Or we could merge with AI and not need all this biology. Sadly I fear we’ve run out of time. It is becoming apparent that more technology is only accelerating us to our end. It is ecology we need to save and technology we need to give up.
Why would you care what other people think of Elon Musk? Is he a relative?
And a lot of people may appreciate some of his accomplishments and yet dislike the man because he’s embraced a far right agenda, much of which is antithetical to his stated EV “mission.”
Pedantically: Elon Musk was not a founder of Tesla.
One thing I’ve noticed: those who take extreme risks are often people who have nothing to lose, or those who have so much that losing doesn’t mean much.
The ambitious and poor in the US often join the military to fund their higher education and support their families.
Musk smells more like Harvard dropouts Bill Gates and Zuckerberg.
anonemouse: well stated
I’m not particularly fond of Musk. He has made a mess of the operation in Buffalo. He fleeced his own shareholders when he forced the buyout of his solar energy company. I like what he has done with SpaceX more than his other accomplishments, although there was a pretty big oops today. I’ll watch as he takes the first flight to Mars. And to be fair, of course, he hasn’t accomplished all he’s done on his own, but that’s the point of management. Build the team, set the goals, go get the resources and motivate your stars to do the work. He has done this right several times. Sometimes it doesn’t work, however because he lacks patience. He always seems to be in a hurry and he seems to get bored easily. Twitter has been a disaster, and not just for him. He may be a genius (according to my test scores so am I and I also get bored easily) but as to the the econ degree he must have missed the classes that discussed elasticity coefficients. If your profit margins go down when you lower prices while sales go up, lowering prices is the wrong plan. Even more so when operating profit falls. That means that not only is your product’s price elasticity wrong for a price reduction regime, but the firm’s operating leverage is also wrong. I wouldn’t brag too much about my econ degree if I missed those two basics. Also, Musk may not know that if he cuts prices below out-of-pocket costs to beat his competitors, he would be breaking our anti-trust laws.
Musk has certainly had more impact on humanity’s future than all but maybe a handful of people regardless of whether or not he grew up with a silver spoon in his mouth (or emeralds in his pockets), but his turn to right-wing troll is unfortunate. The reply on this thread sums it up nicely: https://twitter.com/paulg/status/1645102218482253824?cxt=HHwWgIC8_YzwydQtAAAA