Reevaluating Previous Performance And Mistakes Made
Starting with a review of my previous assessment, my stance on Tesla (NASDAQ:TSLA) was overly optimistic, a ‘Buy’ recommendation. Regrettably, my forecast missed the mark, as the stock has delivered a concerning -18.42% return since my last article, notably underperforming the S&P 500’s +4.04% and yielding a negative alpha of 14.38%.
In retrospect, I recognize two significant errors and a misjudgment.
Firstly, I allowed myself to be carried away by Tesla’s futuristic promises, overemphasizing the potential of the industrial robots business and full self-driving technology (FSD). However, I failed to remain grounded as a realistic investor, ultimately succumbing to the charisma of the entrepreneur’s grand vision.
Secondly, my valuation analysis fell short, as I relied too heavily on historical trading multiples without considering the dynamic nature of the fast-growing company’s valuation band.
Lastly, my thesis overlooked the risk of further microeconomic-related pricing cuts for Tesla. Unfortunately, this risk materialized, and I failed to promptly adjust my expectations and revise my stance.
Looking ahead, I will provide more timely updates and revisions in a pinned comment to accommodate key developments.
Revised Thesis
I have revised my position on Tesla to ‘bearish’, anticipating underperformance relative to the S&P 500 (SPY) (SPX). The upcoming Q4 FY23 earnings release on Jan 24, 2024, is unlikely to challenge these expectations, owing to the following:
- Tesla is experiencing a slowdown in automotive sales
- Structural price cuts are negatively impacting margins
- Tesla’s valuation remains excessively high, even in the context of a technology company
Tesla’s Automotive Sales Plateau
Automotive sales, comprising nearly 80% of Tesla’s total revenue mix, have stalled around the $20 billion mark over the last four quarters. Furthermore, year-over-year (YoY) growth rates have been steadily decelerating since Q1 FY22. Notably, in Q3 FY23, the growth rate plummeted to 4.5% YoY.
Tesla’s investor presentation for Q3 FY23 highlighted a concerning trend, revealing a significant divergence from the broader auto industry’s revenue growth rates since Q2 FY22. Although Tesla continues to grow faster than its industry counterparts, the gap is markedly narrowing, casting doubt on its ability to sustain its rapid growth.
With no imminent catalysts for revenue revival, apart from the distant prospect of the Cybertruck launch in 2025, and no clarity on the timeline for the introduction of lower-priced cars, Tesla’s near-term sales outlook appears bleak.
Margin Erosion Due to Persistent Price Cuts
Despite expectations to the contrary, Tesla has persistently slashed prices across the US and China, adversely impacting the gross profit margins of its automotive sales, which plummeted to 15.7% in Q3 FY23. Model 3 and Model Y, constituting over 95% of total deliveries, witnessed price reductions, exacerbating the margin pressure.
Furthermore, Tesla’s continuous reduction of automotive cost of sales, coupled with the indication of further room for cuts, intensifies concerns about the sustainability of its margin profile.
The pattern of structural price cuts and their resultant impact on margins raises substantial apprehensions about Tesla’s ability to maintain profitability and efficiency in the face of burgeoning competition and evolving market dynamics.
Tesla’s Pricing Strategies and Financial Position
In light of recent financial reports, investors remain wary of Tesla’s pricing strategies and its overall financial position. The company’s effort to offset lower sale prices has resulted in continued declines in unit gross profits. Over the last 6 quarters, automotive gross profits have plummeted by almost 53%, from $17,865 to $8,431.
The Implications of Pricing Cuts
Tesla’s CEO, Elon Musk, attributes their pricing cut decisions to rising interest rates and the pressure it places on maintaining the affordability of their cars, especially for buyers using loans. Musk emphasized the significance of the monthly payment in car purchases and expressed concern about the impact of rising interest rates on buyers’ ability to afford the company’s vehicles.
However, the question arises – will potential rate cuts in 2024 lead to price hikes in Tesla’s cars? Analysts doubt this for several reasons, including elevated recession probabilities in the US and Musk’s passionate stance on the struggles of the typical American amid current cost of living pressures. This skepticism implies that Tesla may be compelled to hold off on price increases, even if interest rates fall.
Comparative Performance and Valuation
Despite Tesla’s margin contraction due to price cuts, other automotive companies have not experienced a similar decline in their margins profile. This raises concerns about Tesla’s performance relative to its competitors.
When viewed as a technology company, Tesla’s valuation appears to be very expensive. Tesla’s 62.6x 1-year forward price-to-earnings ratio is at a substantial premium to the median 28.2x PE of other technology giants such as Amazon, Microsoft, and Apple.
Technical Analysis and Key Risks
Technical analysis of TSLA relative to the S&P 500 indicates a bearish trend, with potential for further downside. This analysis suggests that Tesla may underperform relative to the S&P 500 in the near future.
Key risks in the current climate include the potential for price hikes in vehicle models and the impact of consumer sentiment on spending for durable goods. Data from the University of Michigan Consumer Sentiment surveys indicates that high prices are a major reason for poor buying conditions in vehicles, overshadowing the impact of high-interest rates.
Evaluating the Situation
Considering the lack of new model releases, stagnant automotive sales, and the increased risk of continued price cuts, the outlook for Tesla appears uncertain. Moreover, the company’s hefty valuation raises concerns about its overvaluation in comparison to industry peers.
Having revisited the assessment of Tesla, analysts are adopting a more cautious stance. The lack of major product launches or meaningful scaleups on the horizon, coupled with the risk of continued price cuts and an inflated valuation, indicate a bearish outlook for the company’s near-term performance.
With the upcoming Q4 FY23 earnings release, investors are anticipating insights that could either reinforce or challenge the current assessment of Tesla’s financial standing. The prevailing sentiment suggests caution, with a ‘Sell’ stance on the stock.
Interpreting the Ratings
The ‘Sell’ stance indicates the expectation for Tesla to underperform the S&P 500 on a total shareholder return basis, reflecting growing skepticism about the company’s near-term prospects. This assessment is driven by concerns over pricing strategies, financial performance, and the company’s valuation relative to industry peers.
The analysis provided is aimed at offering a sober assessment of Tesla’s financial and strategic position based on current market conditions and long-term prospects. Investors are advised to exercise caution and consider the implications of the latest financial data on their investment decisions.
