We are updating our model to reflect Tesla's 10-K. We are not making changes to our Overweight rating or our $300 price target (based on DCF with WACC = 13.5%). After reviewing Tesla's annual report, we think three topics warrant attention. First, while most investors are aware that price cuts may lead to margin erosion, we think warranty expense is being overlooked. Q4 gross margin would have been 200bps higher if not for increased warranty spending, and we're cutting our 2023 gross margin estimate slightly to reflect this. As discussed on page 2, we think the higher spending is likely due to innocuous (and temporary) issues. Second, Tesla's exceptional cash conversion cycle, which is illustrated on page 3, remains a key enabler of lower prices and higher capex. Finally, it's too early to declare victory, but the historically wide gap between expected and actual software revenue is starting to close. Download...
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