Tesla reported stellar FQ1'22 results earlier last week driven by strong gross margins from its automotive business. For context, Tesla’s cost of goods sold per unit increased a modest 3.5% to $36,300 in an environment where key components like lithium carbonate are up over 70% year to date. We’ve included a slide below that shows how Tesla is bending the cost curve lower through manufacturing innovations like single-cast parts, etc. Tesla has become the industry standard and peers will attempt to replicate their approach as the industry did with Toyota and LEAN in the 1980s.

On the production side, management still targets >50% YoY growth and possibly even 60% growth this year, despite having lost one month of production in its largest plant, Shanghai. Interestingly, the company generates ~$6.5k of free cash flow per vehicle sold, compared to a legacy OEM that generates between $400 - $1,300 in free cash flow per vehicle. This underscores the superior cost position and pricing power of Tesla.

We continue to believe the market meaningfully underestimates Tesla’s earnings potential over the medium-term, driven by a faster pace of plant expansions and a higher attachment rate of full self-driving. 

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