Ways TSLA Energy Business Outshines AI Aspirations, International Sales Offer Strength

[00:00:00]We are back [music] here on the watchlist. I'm Sam Varney. It's now time for the watchlist panel and we're previewing Tesla's earnings uh which come out later tonight. So, joining us right now is Steve Westly, founder managing partner of The Westly Group.

[00:00:11]Steve, we already have clues from these delivery numbers that we get, but what's not known that we really want answered tonight by Musk and Co?

[00:00:20]>> Well, I think everybody knows the headlines. Strong quarter, fourth highest revenues, uh largest quarter in in history, sold 480,000 units. But but sales are rising on high gas prices. And the question is how long will they be up and can they depend on that? Big picture, can they show year-over-year growth in 2026? So, I I call it the Tesla is a tale of three cities. Auto sales are up, riding on this wave of gas prices, high gas prices.

[00:00:48]But everybody's waiting for new tech.

[00:00:49]Robo-taxi late, Optimus postponed.

[00:00:53]People are waiting to see whether those are real and when. The saving grace though, I think could be their energy division. 2026 revenue probably 16 billion in energy alone. That may drive them back to a growth year. Tesla may not be the tech company investors are hoping for, but being a leading EV and energy company may be the next best thing.

[00:01:16]>> Yeah, it's interesting because that's not always been a big part of the business, but it's certainly getting a lot more attention recently given the the current state of affairs and given we need all this power and Elon Musk has really positioned himself as the answer to all of that. So, when you talk about the tale of three cities and some of the delays we've seen, obviously Optimus postponed, do you think that the market that investors are willing to be patient if we see um strong growth, stronger growth I'll say, coming through from the sales side, uh the car sales side, and also the services when you talk about FSD subscriptions and supercharging networks, et cetera?

[00:01:55]>> And so, here's what I think.

[00:01:58]Everybody understands that there's a revolution in AI going on. It's triggering this massive build out of data centers in the largest energy G demand in history. And if you can be not only the leading EV provider, but also with a rapidly growing energy division providing more and more of the energy for the world's uh utilities, that is a pretty good thing. They've just said they were going to be putting on a new 50 gigawatt plant in addition to the plant in Shanghai, the one in Lathrop, California. That is a lot of capacity.

[00:02:32]It's going to drive growth. The margins seem to be healthy. But, at the end of the day, if they don't get that full self-driving thing solved and get a firm date for Optimus, you may be some uh see some grumpy investors. We'll have to see.

[00:02:47]>> I'm glad you mentioned the Shanghai factory because we do have Tu Le, managing director of Sino Auto Insights, uh joining the conversation who looks at China very closely. Good afternoon to you, uh Tu. Thanks so much for dropping by. Uh just walk us through what you're expecting on the China market side given that Europe and China are largely being seen as, you know, areas that are trying to offset some of the weakness we're seeing here domestically.

[00:03:11]>> Well, the the Tesla production is very, very strong in in Shanghai Gigafactory, over a million unit factory, just just about a million unit factory. And so, what is going to be very interesting to see is how that splits out into local demand, local retail demand, versus how much has been exported because what's happening in the China market overall is the passenger market is shrinking, but exports are surging. And last month, we were at a million units of exports for the total automotive sector. So, I think Tesla's going to play a role in that export number and still have some weakness in demand locally in China.

[00:03:53]>> Well, what about the EU market then, Tu Le?

[00:03:58]>> I'm going to give you a quick example.

[00:03:59]Xpeng last week was in Munich showing off their brand new vehicle, a 40,000 euro Mona L03 or an Xpeng L03.

[00:04:08]It's almost the size of a Model Y at 40,000 euro. Many more features than the the Tesla uh Model Y and it's going to be offering its own intelligent driving service. And uh it's going to be using Google Maps to help it do that. So, there's going to be more and more Chinese competitors for Tesla in Europe as well.

[00:04:31]>> Ah, interesting. I was just looking at that car. It's uh quite nice looking.

[00:04:34]Steve, getting back to you.

[00:04:37]As far as the numbers are concerned tonight, um do you suspect there's going to be margin pressure from the loss of the federal EV credit? Um I mean, you know, also what are they going to say on some of the CapEx, which obviously is going to be a part of the margin story, too?

[00:04:55]>> Well, I think the big question will be margins. Obviously, you've got a strong growth quarter, but I think margins may trend down a little bit. And that gets to the question of is this going to be a car company for the long term and with compressed margins, especially coming with increased Chinese pressure? Or is this going to be a tech company and an energy company? Cuz the margins from the energy sector are quite quite good. And again, building a 50-gigawatt battery production plant, that will make them, over the next 12 months, one of the largest energy companies in the world at precisely the time there's historic demand. But they've got to find an answer to two questions. Increased competition from China forcing margin erosion in the auto business. They've got to get lower-priced units, I believe, to market. Combined with can they get a product uh uh that full self-driving product out.

[00:05:48]Now, a lot of people who drive Teslas like me know that full-self-driving works okay, but it's still level two.

[00:05:54]They've got to get more regulatory approvals beyond Texas and San Francisco uh to go toe-to-toe with Waymo. Waymo had approval in 11 cities today, 24 by the end of the year. Tesla's got some catching up to do.

[00:06:10]>> Yeah, because I had an analyst out today saying that they're only up to their seventh city, I believe. So, yes, you do point out an interesting point there.

[00:06:18]And too, just getting back to the international side of the business, I mean, where are we up to on FSD in China? I know they've hit multiple snags there, but it did look like they were gaining some traction in the European market on the services side front as well. So, can you give us an update on where we might be up to with those particular markets?

[00:06:37]>> I'm going to piggyback off of Steve's comments. Are they an automotive company or a tech company? And with regards to FSD, are they a regional tech company?

[00:06:47]Because as of right now, full FSD is not available in China. And although they might want to tell you it's right around the corner, um that it's going to be available, I I haven't heard anything to that extent that it's going to be available in the near term. So, is this valuation including FSD, full FSD being a part of the China market?

[00:07:09]Now, we already know that Xpeng, Li Auto, Nio, Xiaomi, Huawei, Momenta are all competitors in the L2 plus. So, there's no no blue ocean for Tesla in the China market with regards to FSD, and whether or not it's going to have uh the entire market, cuz it won't. So, again, downward pressure on on share price because if it's a tech company and it's not really ubiquitous, their technology is not ubiquitous in China, what does that uh lead to for them? So, >> Yeah, I know that's a really interesting point that you make. Guys, thank you so much for the preview. We crunched a lot in there. Two Lee, managing director Sino Auto Insights and Steve Westly, founder managing partner of the Westly Group. Appreciate both of your time.