Tesla's Remarkable Surge & HSBC's Major Overhaul

Welcome back to The Deal Room, and we have two hot stories from last week that we wanted to unpack and bring to you. And of course, I've always got the, the awesome Stephen Barnett, who's the master of breaking these topics down, to explain to me two things. Tesla jumped 22%, I believe, last week. That was a mega move. In fact, the best day for Tesla in 11 years. I know it was only, what, 3 months ago everyone was kind of writing Tesla off a little bit, and here we are. And we also had HSBC, really big news last week, and I'm sure there's lots of people interested in that from either HSBC or one of their clients. They work at HSBC or they're applying to HSBC, but some major reorganization happening at the firm. I'd love to know what's happened there, Stephen. So perhaps we can start with Tesla though. What, what did you make of that?

Yeah, it's quite remarkable when a company of this size has a moderate earnings beat and jumps up 22%, its share price jumps up 22%. Remember, this is an $800 billion market cap company. So this isn't a small company and maybe one for you, but why is it? Because Tesla is so thickly traded. Is there just a lot of liquidity? Why are price move so vast for what is actually not a particularly big piece of news?

Yeah, it's interesting. I think there's, um, this was probably against expectations. I actually thought, I mean, we'll go, we'll dive into the numbers in a minute, but more broadly speaking, I thought a lot of Elon's commentary of late has been a bit of a pivot as a distraction away from the fundamentals of the company, which makes them, this impact so much more meaningful cause the bar I thought was very low. I was just, you know, not tracking it day to day, but I thought the whole cybercab thing being a bit of smoke and mirrors to a large extent. Uh, and then also this whole kind of fascination he has now, he's basically on the campaign trail with Trump at the moment. Uh, it looks like trying to secure himself a seat at the table if Trump becomes president. And I thought that these numbers were gonna be Okay, and they came out and some of the things he was saying, I think, well, one of them obviously on the outlook, which is incredibly important, doubled what Wall Street was expecting. I think that in tandem with a lot of people having a slightly more bearish kind of setup into that just meant that that exacerbated the move. Um, you're right though, I don't know all the numbers, but there's a lot of retail attention paid to this stock. of course, and that does tend to juice some of these moves. I mean, the volatility factor is exponentially higher than, say, a Microsoft, for example. Um, and then just looking, yeah, things like short interest and all these other kind of things that you could start to factor in. But yeah, I would put the 22% in context of Tesla, not 22% in the context of a trillion-dollar company comparable like the other big mega-cap tech stocks.

Which is why we get quite excited because there are these vast swings to the positive and to the negative. And what I find so interesting about this, and we'll dive into the numbers in a minute, what's so interesting about this is Tesla is, its valuation is predicated on the future of robotaxis and autonomous driving and high gross margin software capabilities within what they do. And, you know, let's not even start talking about Optimus, the robot that was, uh, that was well, well panned at the, at the, at the event a couple of weeks ago. But what's so interesting about this company is the big song and dance event at the Warner Brothers Studios a few weeks ago where they launched the robotaxi, the the van, the Optimus, and it was all very snazzy and very exciting and very kind of 2050. The share price went down 10%. And we've commented on this in the past. You know, it's a little bit of smoke and mirrors. There's not a lot, there wasn't a lot of hard numbers. It was just look at the future and look at what we can do. And the share price dropped 10%. Now, when they come out with some hard numbers, which is what they did in their Q3 release a few days ago, this is what the analysts really care about. So yes, the valuation is predicated on the future state of a very exciting autonomous driving new economy type business, but what investors still really, really care about is the cold hard numbers. So let's just dive in very quickly to, to what the numbers were saying. So there was an earnings beat. So Tesla declared Q3 2024 earnings per share of $0.72, uh, versus $0.60 expected, uh, a net income of $2.5 billion, and really, really importantly, a higher gross margin than expected. So the Street was expecting the gross margin, so this is revenue minus direct costs, cost of goods sold, you know, the building of the cars, to be around 16.8%. And this gross margin has been going down and down and down as the cars have become cheaper. You know, Musk is trying to make cheaper EVs accessible to everyone. So the fact that the gross margin has jumped back up to kind of an industry standard slash industry-leading almost 20% is representative of the fact that to get a little bit technical, the economies of scale and the efficiencies that are being created through these massive plants in Shanghai and in the US and in Germany is outstripping the cost reductions that Tesla are making to their vehicles, which is extremely exciting from an investor's perspective. Then you layer on the fact that Elon Musk and this earnings report said, look, 'We are on track to put the sub-$30,000 affordable EV,' which is what everyone's quite excited about, 'put that into production next year, and we're going to get a million on the road by the end of 2026.' That kind of stuff is like, okay, all right, well, they've proven that they can decrease— they can maintain gross margins whilst decreasing the list price of the vehicle. They're actually being run extremely well. And that's what investors really care about. And that's what sends the stock up 22%. Yes. All of this other stuff about the Cybercab, you know, I think he mentioned that the Cybercab is going to reach volume production in 2026. So volume production means beyond a kind of prototype. This is at scale, potentially 2 million Tesla Cybercabs per year. And that's obviously the exciting bit. But the numbers are making sense as well. And when you combine the excitement of that flashy event a few weeks ago with all of the amazing, all of the improved numbers, then you've got a really, really good story. And that's what resulted in the 22% growth in the share price.

Two things I saw. I'll take them one at a time to get your thoughts. The first one was profit margins. You mentioned them there. In the third quarter, boosted by $739 million in revenue from environmental regulatory credits. So if you were kind of new to the Tesla narrative, like, you'd be thinking, what, how does, how exactly does that work? They're making money off environmental regulatory credits. Like, what is that? How does that work?

Yes. I mean, so, so the, so the, the reason, and it's, it's so interesting that Musk is, is pinning his flag to the, to the Trump Party because he has been a massive beneficiary of the Inflation Reduction Act and on subsidies for electric vehicles. And interestingly, when he talks about this $30,000, sub-$30,000 EV, he always says after subsidies, after, after benefits, sub-$30,000. So it's that gap between the list price that that Tesla's getting in terms of revenue, and then the list price that the customer is seeing, that is the environmental benefit that they are getting. And it's a not insignificant number. So if that starts to go away, then yeah, then it's going to be a little bit of a harder sell from a share price perspective.

Yeah. And then the second and final piece here was that Musk said that— and I like this, I like what he's— he's a classic kind of Trump, Boris type communicator in terms of giving himself plenty of buffer for when outlining targets like KPIs, of which anyone else would be held highly accountable to. So he said his quote, best guess is that quote, vehicle growth will reach 20 to 30% next year. And the Wall Street expectation was 15%. So, I mean, It's not unusual to hear big numbers like that, but I guess the market didn't just move on that, right? That was just one of multiple points that you said here, which were very positive.

Yeah, absolutely. And it's actually great to see, again, we spoke about actually getting in and looking at the earnings call and the Q&A and things like that, and to see the difference in personality between Elon Musk and Larry Fink that we spoke about last week and Jamie Dimon. It's absolutely fascinating. I'm going to talk about that in a second. But firstly, I was thinking to myself, we haven't done a quiz in a very, very long time, and Tesla's fascinating, and I want to do a bit of a Tesla quiz. So, and here we go. Question 1: How many cars did Tesla deliver in the last quarter? What do you reckon?

Well, I should know because I should have looked at this as preparation for this podcast, but Um, oh God, it's going to be an awful guess. So in the last quarter, 500,000.

Wow, you, you do, you do your— no, no, you do yourself a massive disservice. That was a brilliant guess. So they've delivered in Q3 462,890. So you are in the kind of the 10%. I think, I think we'll give you a very, a very big tick for that. Well done. So Tesla delivered almost 500,000 cars in Q3, which is up 6.4% quarter on quarter. And just for anyone that's interested, 440,000 of those are Model 3/Y, meaning that the other 22,000, you know, you've still got a— I think they're still producing Model S's, but it's probably Cybertruck, right?

Yeah, that's what I was exactly going to say. I thought the Cybertruck was going to be the leading flagship vehicle, but No, no, I don't think it will be.

But, uh, yeah, I still, I still haven't seen one in the wild yet. But, uh, but anyway, so question 2, uh, how many Supercharger stations are there worldwide? And I'll give you a point to the nearest thousand just to get, just to set you some parameters.

With Supercharger stations, does that mean per unit of plug-in, or are these centres where you would classify as one unit?

Per unit.

Okay, so per unit. Um, 3,800.

Again, it's not that bad. 6,706. Um, and this is, you know, and again, this is why we love talking about Tesla, because it really has tried to revolutionize not only the product, which is the EV, but also the infrastructure that lies behind the product. And as a Tesla user, I'm always delighted when I go to a service station and all of the non-Tesla EV chargers have got a massive queue and then I just saunter right up and, and get a bit of charge myself. So it is an amazing value add. 7,000 We got 6,706. So yeah, it's pretty impressive.

Yeah, you know, this is killing me, like having to do a quiz about, you know, the man and company that I'm not a big fan of. This is like trying to have to guesstimate. It's really challenging me.

Yeah, sorry. I thought, I thought I'd, I thought I'd test you, but, uh, okay. So, oh, okay. In, uh, on October the 22nd, so only a few days ago. Tesla hit a pretty significant milestone in terms of how many Tesla vehicles have ever been sold. Significant milestone was hit a few days ago. How many vehicles do you think that Tesla have sold ever?

What? If it's a big milestone, it's got to be a round figure. I'm just doing that. So 10 million.

Again, I think even though you hate this company, I think your guesses are pretty good. So it's hit 7 million Teslas sold. So, you know, this is, you know, and again, in the earnings release you'll see its market share, and the market share of the entire automobile industry is, you know, is it 2 or 3%? It's not massively significant, but market share in terms of EVs, you're getting, you're getting pretty significant. And 7 million Uh, it's a pretty, it's a pretty big number. My last question, and this is quite awesome. So to the nearest 100 million, the total number of autonomous supervised hours driven. So this is testing hours of autonomous Tesla vehicles going round and round San Francisco and round and round California and, and putting in those hours of training. To the nearest 100 million?

600 million.

Over 2 billion. 2 billion hours have been driven, super, you know, and when I say supervised, it means that there's, there's a driver willing to take the reins. But 2 billion hours of autonomous testing driving has gone into feeling that level of confidence to be able to say, look, I'm going to get the CyberCab, into production next year, and it's going to be on the road in 2026. So it's a, you know what, it's, I know you don't like it.

Can I just, can I just ask, who's verified these numbers other than Tesla?

Well, that's a good question. And, uh, you know, so when, when we come to 10-Qs and when we come to financials, we're pretty confident that they've been audited and, you know, they've, they've accorded to the generally accepted accounting principles, and, and we're pretty happy with that. When it comes to 2 billion hours of autonomous was driving. I don't know, it's just a— it was just in their report.

I was about to ask, and I was also going to say, who, who does Elon Musk know at the auditors, and who does he use?

Oh, I know, I know. I, I— well, look, we're not, we're not here to speculate, but what I am here to say is, if you are going to— I'm just going to finish off this piece, uh, if you are, if you are interested in looking at earnings calls, as we've discussed previously, and you want to get a little bit of, a little bit of color on these different companies companies and how the CEO interacts with investors and things like that. The Tesla one is really interesting. If you remember last week, we spoke about the Q&A within the earnings call, and usually the questions are asked by, you know, equity research analyst at Goldman Sachs, equity research analyst at HSBC, whatever it might be. What happens with Tesla is Tesla investors, Tesla shareholders, can submit a question and then they can upvote other people's questions. So it is almost kind of a democratic AGM-style forum, and you can see all of these questions getting upvoted on the website. It's, it's all very transparent. Um, and the most upvoted question was quite a normal one: Is Tesla still on track to deliver the more affordable Model next year? And Elon said, yes, next year, sub-$30K with benefits. But then the one that I like the most was, I think, the 8th most popular, uh, question: when will Tesla incorporate X, aka Twitter, and Grok in all the Tesla vehicles? Grok is their NDE LLM engine that works off of X. And then Elon goes on and says, yes, well, look, you know, this is going to be fully autonomous, so we want a proper browser environment. Then he starts getting obsessed with the games that you can play on a Tesla at the moment. So he's just like, look, at the moment there's some fun games. By the way, people haven't tried it. There's Castle Doombad and Polytopia and a bunch of really fun games in the car. And then Lars Moravy, the CFO— oh no, sorry, the Vice President of Vehicle Engineering— says something. Then Elon Musk comes back and goes, yes, play Castle Doombad. You won't regret it. So this, if you think about all of the dry and stuffy earnings releases that come out, it's quite fun just to take a bit of a deep dive into the world of Tesla and Elon Musk.

All right, well look, let's move the show on and let's talk about this announcement of a major overhaul at HSBC.

Yeah, so we've spoken periodically about HSBC in the past and it's interesting. HSBC is interesting for a number of reasons, right? Firstly, it is the largest UK listed bank by quite some way. Secondly, a lot of people might consider applying for HSBC, so it's useful from a student perspective. But thirdly, it's this really, really interesting case study on geographic economies of scale and also geographic diseconomies of scale. And over the last— well, a little bit like in the UK, the Conservatives in Europe, this, this, this issue of whether HSBC should be headquartered in London or in Hong Kong has been the talking points, the bugbear of senior executives for decade after decade after decade. And actually, over the last few years this question around, well, should HSBC be HQ'd in Hong Kong or London, which it is at the moment? And actually, more importantly, or maybe more significantly, should HSBC be split up? Because what's weird about HSBC at the moment is that it's listed in London, its HQ is in London, but its main profit driver is Asia. So you're getting London dictating quite a lot of decisions and paying out dividends off the back of Asian profitability. So you've already got this kind of conflict and complexity. And if you remember, Ping An, the Chinese insurance company and largest investor in HSBC, became pretty active in trying to get the company split up. So HSBC Asia, HSBC rest of the world HQ'd in the UK. And actually last year at the investor conference, it got massively voted down. But the headline that came out a few days ago is that George El-Hedary, if that's how to pronounce his name, the new CEO, 6 weeks into the job, Lebanese-French background, a lifer at HSBC, speaks Mandarin, the first Mandarin speaker in the company, uh, CEO in the company's history. He's come in pretty quickly. Within 6 weeks, he's restructured the organization to create a UK division and a Hong Kong division. Now, the UK as part of the 4 main divisions of the bank. So they've, they've now got a UK division, which is, which is responsible for banking across Europe and America. Then you've got the Hong Kong division, which is responsible for banking across Asia and the Middle East. Then you've got International Wealth and Premier Banking as the third division, and Corporate and Institutional Banking as the fourth division. Now, this is a pretty significant restructuring of the bank. Designed, and you've got two different perspectives here, and this is where we start thinking about optics and strategy and things like that. So in the press release from HSBC, why are we doing this? Why are we changing the organizational structure? Previously, by the way, it was UK HQ'd Global Banking and Markets that had responsibility for all the regions, Commercial Banking had responsibility for all the regions, and Retail Banking as well. So why are we now going down these kind of geographic verticals? Well, firstly, from an HSBC perspective, there could be savings, cost savings, collapsing layers of its matrix of geographical and product managers. It's a similar playbook to Citi as it was trying to become more efficient. And also, if you create a UK and Western CEO of that division, they can focus on the opportunities specifically in that region and not have to worry too much about what's going on in Hong Kong and Asia. Whereas the CEO of Hong Kong and Asia can be like, well, look, here are the opportunities here. And it kind of liberates the two units to focus on where the opportunities are in their own backyards. Now let's think about it in a slightly wider context. Why are they doing this? Well, there are kind of 3 or 4 reasons. Firstly, there are significant geopolitical tensions that we know about, right, between the West and the East, between China and the US, between a potentially future Trump government, uh, relatively antagonistic towards China. And this has already caused HSBC some significant problems. There was a data sharing issue that came up a few years ago that actually ended up with a senior member of Huawei being arrested, and that was HSBC having to share data from a Chinese counterpart to US authorities. That's really, really problematic, and it's really hard to create— to use a phrase— a Chinese wall between the two parts of the organization. The second reason is activist investors. If you've got Ping An, who own 4.5% of HSBC, knocking on your door and saying, you know, we want you to be fully split up, or we want you to be fully located in Asia, well, this could, you know, turn the heat down a little bit and just say, all right, you know, we've listened and we are changing. We're not going to go all the way, but we've compromised. And then thirdly, and, you know, reading a couple of commentators, this probably is the biggest one. It gives HSBC optionality. So if 6 months down the line, 12 months down the line, 24 months down the line, the geopolitical situation worsens and there is this kind of urgency to split and to become HSBC UK and HSBC Asia-Pac, then it becomes a lot easier and a lot more logical to do so without having to do some kind of fire sale reorg in, in reaction to a geopolitical event. So there's loads and loads of interesting stuff that make this story, and this is why it's so interesting.

Yeah, very interesting on your last point because they did say at the end of the press release that more details are expected with their 2024 full-year results because a lot of this stuff isn't kicking in starting until January 1st, 2025. So obviously the election is happening in the US about a week or two's time, then you've got the, the details of this to be fleshed out. So certainly you're going to hear more about this, I'm sure. And then a final point, I just wanted to shout out Pam Corr. So Pam Corr, currently the group's Chief Risk and Compliance Officer, is going to see a change and will assume the CFO post on the 1st of January, marking a historic moment. It's HSBC's first ever female finance chief. So I know Pam's a big fan of the pod and a big listener, so Great job, Pam.

Well done, Pam. Good job. And the last thing I, the last thing I want to say on this story is, is again, just from a strategic perspective, for anyone that's thinking about this with their, with their strategy hat on, you've got this really, really difficult cost-benefit analysis of being geographically very diverse. So you've got the benefit of, you know, all right, I can sell, I can cross-sell, I can do, uh, you know, I can do business in lots of different countries with the same client, very international, I can do trade finance. But on the flip side, you're really— your decision-making infrastructure is super, super disparate. You're operating across different time zones and different nationalities. And when do the benefits of being operational in lots of different countries start to get outweighed by the inefficiencies of the difficulties of communication and delegation, command and control, and things like that? So yeah, I would think, you know, we're going to keep talking about HSBC. Partly because I used to work there, but partly because it's also interesting. Thanks, Ant.