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Tesla price cuts are ‘a success’ amid Elon Musk’s recession expectations: Fund manager

Future Fund Managing Partner Gary Black joins Yahoo Finance Live to discuss Tesla's fourth-quarter earnings beat and Elon Musk's strategy towards weathering a recession.

Video transcript


DAVE BRIGGS: Tesla shares rallying today, up now 10%-plus after the company reported fourth quarter earnings, and CEO Elon Musk appears to have cooled fears surrounding dwindling demand for electric vehicles. Here's what Mr. Musk had to say about that demand on the earnings call.

ELON MUSK: Thus far in January, we've seen the strongest orders year to date than ever in our history. We currently are seeing orders at almost twice the rate of production. So I mean, that-- it's hard to say whether that will continue twice the rate production. But the orders are high.

DAVE BRIGGS: Joining us now for more on Musk and the Tesla story long time Tesla bull and Future Fund managing partner Gary Black. Gary, good to see you.

GARY BLACK: You too.

DAVE BRIGGS: So can you just say that the price cuts between 7% and 20% here in the US were a success, or is it too early to tell?

GARY BLACK: I think there is success. Look, the quarter itself, the fourth quarter itself was kind of unspectacular. The gross margins were weak. If you look back at all the nonrecurring things in the quarter, they actually missed. But as you point out, the conference call was pretty successful.

Elon got on there and showed a lot of confidence and said the January orders were about twice what production is. He even kind of hinted to maybe we could even do 2 million units in 2023. And that's what's pushing the stock up 10% today was really the outlook on the volume side, which was a result of cutting the price about three weeks ago now.

Stock's up almost 50% since they cut price. So that's a tell.

SEANA SMITH: Gary, what about recession? It came up a couple of times during that conference call. When you talk about demand, a looming recession, that, of course, you would think would be a big risk. But Musk actually had a positive spin on it. In part, he said, "If the recession is a serious one, we expect to see deflation in our input costs most likely, which would then lead to, yes, better margin." Do you buy that?

GARY BLACK: I don't think investors listen to Elon's economic forecasts. I think he's viewed as a great engineer, a great product guy, a visionary about climate change and accelerating the world's transition to a sustainable world. But he's not an economic forecaster.

I think most people, including myself, believe if we have a recession, it's going to be extremely shallow because the Fed can cut rates any time, and they probably will. So I don't think people are buying into that there's going to be a recession.

I think what people are excited about is-- remember, last year, fourth quarter was a disaster. They were cutting price in China. They were promoting to hell to try to get to a number in the fourth quarter in the US. And it looks like, when you hear them talk yesterday, that the volumes are surging.

And so now people are thinking, OK, well, the 2023 volumes will probably be pretty good. And people are even talking first quarter numbers north of 450,000, which would be a really big number. So I think that's what's got the stock on the move. And people are not really paying too much attention to him saying maybe there's going to be recession or there's probably going to be a recession because that's not his skill set.

DAVE BRIGGS: I'm glad to hear you say that because most of us are trying to square the circle of a pretty difficult recession with demand for 2 million EVs, which is kind of difficult to reconcile. OK, so we-- in terms of the margins in Q1, how concerned are you, given those price cuts?

GARY BLACK: So my margin expectation is about 23% for '23. And I'm looking for about 1.9 million volume for the year. So I think I'm probably a little bit more optimistic than the average Street-- the Street's really come down.

If you look at estimates for 2023 since the beginning of the year, they're down about 16%. But to your point, the stock is up, year to date, almost 30%. So I think most people are saying, we're going to give him a pass for first quarter and even for the year if the margins are light. But they've got to hit the volume numbers.

And then people are looking for other catalysts from Tesla for the year. So it's not just the volumes doing better. People are assuming that he's going to give up his CEO role at Twitter, which would be a positive. They're going to at least announce probably two or three more Gigafactories because they've got to get the volumes up to, say, 10 million by 2030.

And the most important catalyst is Cybertruck. Cybertruck we've been waiting for four years. There's 1.3 million preorders. That is a huge catalyst if they can get that out by the end of the year and then early next year.

And there's one more thing that I don't think the Street's paying much attention to, it's called Megapacks. And they're these-- they're basically cells of batteries that they sell to utilities for peak demand. And those things run for about $2 million each. They had a factory come online at the end of third quarter in Lathrop, California that has a capacity of 10,000 units.

So even if you sold, let's say, 2,500 units this year, that's a huge boost to revenue and earnings. And nobody's really paying attention to it. So I think there's a lot of catalysts for this year. And that's why, again, I think the stock is on the move today.

SEANA SMITH: Cybertruck being the big catalyst, I've had some questions about that. I'm still skeptical, looking at the design of it and everything. But Gary, I'll take your word.

DAVE BRIGGS: I want to know if Gary'd drive that.

SEANA SMITH: Yeah, Gary, would you drive that?

GARY BLACK: I have I have an order in the Trimotor. I live in Chicago. I can't wait to drive it up to Nobu in Chicago and leave it there and have all the kids take pictures of it. I mean, it's going to be-- it's so radical looking that you either love it or you hate it. And I think it's beautiful. I think it's going to be a huge seller.

And it's going to-- look, it's going to open up Tesla to a-- we'll call it the under-40 market. Those are the people who are going to buy it. And it's not going to be-- I mean, it's going to be priced where Model Y is. So it'll probably start at 49. The biggest one, which will be the Trimotor, will be 69.

But think about this. This is going to ride like a car. It looks like a spaceship. And it's going to be 0 to 60 in three seconds. What could you not like about this?

SEANA SMITH: All right, you're doing a good job selling me on it. I'm still not fully sold. But I'm in that market that you were saying that people that would be popular amongst--

GARY BLACK: Your man will like it. Your man will like it.

SEANA SMITH: All right, Gary Black, great to have you. Thanks so much for joining us.