Last week, Tesla released its 4th quarter and full-year 2022 earnings. The company’s performance was stellar. There is no other way to objectively describe it. While it’s easy only to debate the impetuousness of Elon Musk or the valuation of Tesla’s share price, doing so might miss the company’s rapidly expanding automotive business. In a recent newsletter post, NYU finance professor Aswath Damodaran (known as The Dean of Valuation) reminds us how impervious the automotive business had been to disruption prior to Tesla. Professor Damodaran describes the company’s ascent as, “[Tesla] is no longer a niche player in a big market…it has moved the sector closer to its vision than the other way around.” Those needing additional proof about Tesla’s business performance only need review the following highlights from its earning announcement.
Tesla sold 1.3 million vehicles globally in 2022, up 40% from 2021.
The Model Y was the fourth most sold vehicle in the world last year, only beaten by Toyota Corolla, Toyota RAV4, and Ford F-Series (It’s noteworthy to recognize that production of Model Y only began 3 years ago, in January 2020).
In the U.S., the Model Y was the sixth best-selling vehicle, out-selling every small SUV except the Toyota RAV4.
From 2018 (the year Model 3 was launched) through 2022, Tesla revenue has grown 280%.
During the period from 2018 through 2022, Tesla gross margin has grown from 18.8% to 26.6.%.
The company’s operating margin in 2018 was -1.2%. For the full-year in 2022 its operating margin was 16.6%.
How does this performance compare to legacy automakers?
Selling just four vehicles along with a few minor “other businesses,“ Tesla generated $81.5 billion in revenue in 2022. This is nearly 65% of the revenue generated by the full-lineup-producing General Motors during its full earnings year in 2021.
Tesla’s gross margin of 26.6% is substantially higher than most legacy automakers. For example, Ford’s gross margin in its full-year of 2021 was only 15.9%.
Even Toyota, arguably the top performing legacy automaker in the world, has an operating margin that trails Tesla. In 2021, Toyota’s operating margin was 10.4%. Tesla’s operating margin in 2022 was 16.6%.
Many Tesla analysts (primarily technology analysts) review the company’s performance and theorize that Tesla ultimately will beat all others in the automotive sector, believing that legacy automakers will never actually compete with the company. Conversely, most traditional automotive experts assume that an influx of EV entrants by legacy automakers eventually will make Tesla an irrelevant player in the industry. The future probably will rest somewhere between those two extremes. Yet, for legacy automakers, the question to answer is where along those divergent outcomes will each of their companies exist? Will their automotive businesses be totally disrupted by Tesla over time? Will their massive EV development investments allow them to maintain or grow revenue and profits? Or, can they develop new products and business solutions that drive new types of revenue and profit that even surprises Tesla?
Professor Damodaran described Tesla as a “revolution unfolding.” The challenge for legacy automakers is to prevent this Tesla revolution from disrupting their businesses. And maybe some of them will learn to shift the competitive battlefield to potentially disrupt the disruptor.
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