The market was on pins and needles leading up to Tesla Motor Inc.’s (TSLA) first-quarter earnings report yesterday after market close.
Ahead of its earnings release, Tesla had made interesting price cuts to two of its top-selling models. The Model Y small SUV price was slashed by $3,000, or 6%, and the Model 3 price was reduced by $2,000, or 5%. This marks the company’s fourth U.S. price cut this year.
These cuts are important because Tesla is the leader in the U.S. electric vehicle (EV) market, so the company had to reduce prices to maintain its market share.
Earlier this month, Tesla CEO Elon Musk wrote on Twitter, “There is plenty of demand for our products, but if the price is more money than people have, that demand is irrelevant.”
The fact is, there are a lot of forces attempting to drive the EV revolution forward right now that have a direct effect on the automakers.
In today’s Market 360, we’re going to review Tesla’s first-quarter earnings, and then I’ll share the best way to profit in the EV space. But first, let’s take a look at the recent U.S. Environmental Protection Agency (EPA) ruling that could boost EV demand.
What’s Driving the EV Market Forward
Last Wednesday, the EPA proposed new emission regulations.
Specifically, EPA Administrator Michael Regan announced in Detroit new EPA emission limits that would require as much as 67% of new vehicles sold by 2032 to be fully electric. These new stricter regulations are effectively a death blow to internal combustion engines and even more restrictive than the current regulations mandated by the EPA.
The new stricter EPA emissions on light and medium duty trucks would take effect in 2027 and become increasingly stricter each year through 2032. Specifically, the EPA is proposing that emissions decline 18% in 2027, 13% in 2028, 15% in 2029, 8% in 2030, 9% in 2031 and 11% in 2032.
These EPA regulations are designed to force consumers to essentially switch to EVs.
A recent New York Times article that followed the EPA proposal questioned if automakers can possibly comply with the new EPA rules. The NYT article said the new EPA rules are expected to force that EVs make up 54% to 60% percent of new vehicles sold in the U.S. by 2030, and 64% to 67% by 2032.
The NYT article also cited that currently the world only makes 10% of the lithium that the EPA will require under these new emission rules. However, shortages of lithium, nickel and cobalt have made EVs more expensive than vehicles with internal combustion engines and are preventing new EV manufacturers, like Lucid Group Inc. (LCID) and Rivian Automotive Inc. (RIVN), and even Tesla, from reaching profitability.
Also on Monday, the new EV tax credits went into effect under the Inflation Reduction Act. A consumer can claim up to $7,500 in tax credits when they purchase an EV car. However, the credits outlined in the Inflation Reduction Act are far more restrictive than EV credits have been in the past – with restrictions on the cost of the vehicle and where the components are sourced. The goal is to encourage more Americans to buy EVs.
As Musk aptly noted on Twitter, one of the top reasons for consumer hesitation to purchase EVs is cost. The tax credit could help ease the burden. Tesla has also laid out a plan for how its next-generation car will start between $25,000 and $30,000. Compare that to the fact that the average cost of an EV in 2022 was $61,488, while the average for all passenger cars and trucks was $49,507, according to Kelley Blue Book.
Can they accomplish it? Hard to say. As we learned in Tesla’s earnings call yesterday, margins are already tight.
Speaking of earnings…
Tesla’s First-Quarter 2023 Earnings
Tesla announced earnings per share (EPS) of $0.85 for the first quarter of 2023, which was in line with expectations. As reported by the Associated Press, Tesla’s first-quarter sales grew by 36%, as a result of previous price cuts. Specifically, revenue for the quarter came in at $23.33 billion, slightly above the $23.21 billion expected.
Tesla’s net income for the first quarter came in at $2.51 billion, down 24% year-over-year. The company’s GAAP earnings were $0.73 per share, down 23% from last year.
The company also said it delivered a quarterly record of 422,875 vehicles worldwide in the first quarter. That’s up from just over 310,000 a year ago. While the company is reporting progress, both vehicle sales and deliveries fell short of analyst expectations.
On the earnings call, Musk cited that an uncertain economic climate was affecting people’s desire to buy new cars. He said he expected “stormy weather” for the economy over the next 12 months.
Every time that the Fed raises interest rates, that’s the equivalent to an increase in the price of a car…
We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here, versus a lower volume and higher margin, [but] over time will be able to generate significant profit through autonomy.
Tesla shares slid 4% in after-hours trading and opened nearly 8% lower this morning.
The fact is, right now, the market is sensitive to the earnings. So if a company doesn’t knock its earnings out of the park, it’s going to get hit. That’s exactly what happened to Tesla shares today.
And while the automakers will certainly profit if they get EV production right, the real winners are going to be the mining companies that make the components needed to power these vehicles.
Take my Growth Investor Buy List stock Sociedad Quimica y Minera de Chile S.A. (SQM). It is the second-largest lithium mining company in the world. The company unveiled blowout yearly results back in March. Full-year 2022 earnings surged 567.2% year-over-year to $3.91 billion, or $13.68 per ADR, up from $585.5 million, or $2.05 per ADR, in 2021. Analysts expected full-year earnings of $13.27 per ADR. Full-year 2022 revenue came in at $10.71 billion, also besting estimates for $10.52 billion.
Company management also noted that it remains optimistic for the future of SQM’s business, as electric vehicle sales should boost lithium demand to nearly 1.5 million metric tons by 2025.
And given the new EPA rules, this should only accelerate the demand and boost SQM’s profits.
SQM isn’t the only “pick-and-shovel” EV play I like right now. In fact, there are several others I’ve added to my Growth Investor Buy List that are well-positioned for upside when EV demand ramps up.
P.S. There is a great divide opening up in America – and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.
On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.
What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.
Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.
It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Sociedad Quimica y Minera de Chile S.A. (SQM)