Tesla’s 2023 strategy

Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.

Tesla’s earnings call got a lot of investors uneasy. It’s clear that Tesla is not worried about short term profits nor stock price. It’s mission is Accelerating the World’s Transition to Sustainable Energy. Profit and stock price is not part of the mission. We are going through hard times and Tesla has prepared to go through them without delaying investments in the mission. Let’s see what Tesla wants to achieve in 2023 and how I understand it’s doing it.

Objectives

The main objective is expanding sustainable products. For that, Tesla wants to (in decreasing order of priority):

1. Produce as many products as possible.
2. Sell every product produced, stabilize inventory.
3. Maintain healthy cash position (war chess.)
4. Keep shareholders happy (maybe.)

It’s not that Tesla doesn’t want to keep shareholders happy. But it wont risk survivability nor slow down the mission to do it.

Strategy

To achieve its objectives the strategy, as I understand it, is:

1. Maximize credits. Take every penny governments and competitors are willing to give.
2. Increase backlog. In case times get rough, make sure that the decision to buy a Tesla is already made and Tesla can maximize production/delivery over the downturn.
3. Keep cash flow positive. As much as possible Tesla will want to keep it’s cash position for bad times. It may need to go cash flow negative to keep selling every vehicle they can, but they will try not to.
4. Maybe buybacks. If cash increases while still selling all vehicles they can produce and the stock price is absurdly low (below 100) they may opt to use the extra cash in buybacks. But seems unlikely for now.

To maximize credits, Tesla cut prices at the beginning of the year. But that wasn’t enough to increase backlog as much as intended, which resulted in more cuts. I would expect more cuts going forward if they find ways of reducing costs until there’s evidence of backlog build up. They want to make sure that pressure from losing their spot in the line forces customers to take delivery if they can. If Tesla didn’t try to increase backlog by cutting prices, those customers that are committing today to buy at price that allows Tesla to stay cash flow positive may decide to postpone the decision in a few quarters if the economy seems bleak. Not many in the Tesla community understand this (or at least haven’t heard anyone mentioning it.) By reducing prices now to minimum profits it allows to build that backlog and leave any improvements in costs as a buffer for deteriorating demand in the next few quarters.

Hard landing

What happens with Tesla if the soft recession that the Fed now expects ends up being a very hard one? In that case Tesla may have to reach into its war chest and even lay off a large portion of its workforce (10%–20%) to drastically reduce costs. It’s hard to understand how much Tesla can reduce costs under stress, but I would not like to be a CEO of a traditional OEM if we get there. Average new car price in the US was at 49,000 USD last year, up from 37,000 USD in 2019. Including credits, Tesla may sell the Model Y below 37,000 USD soon and the Model 3 below 30,000 USD, which is very close to a top trim Toyota Corolla. It only needs cost savings of less than 10% to reach those prices (assuming full credit.)

Stock price

I always try to predict how events will affect the stock price, so that I can measure how well I understand reality (economy, fundamentals and markets.) With this strategy I think TSLA may have higher volatility. Valuation based on earnings will suffer. Any macroeconomy focused investor is probably reducing exposure. And technical support is only clear at about 100 USD. Until important new information is available (economy expectations improve, gen 3, robotaxi) the price can go very low (100 likely, 69 quite possible, 42 unlikely but still not too surprising) and easily rally by 100% in just a few weeks, from a low enough base.

If we have a bad recession, it’s hard to be sure how low it can go. If Tesla cuts prices, reduces head count significantly and still losses money the doom and gloom crowd will be ecstatic. And in that case, it will be difficult for Tesla to spend money on buybacks. The only positive is that I don’t see such a situation lasting long.

In short, it will be a roller coaster. Excitement guaranteed!

Once again, not investment advice. Do your own research. But maybe avoid margins.

Edit: fixed some homophones typos, which I struggle to see.