Unpacking Elon Musk’s admission
“We dug our own grave with Cybertruck. Nobody — generally, everybody digs a grave better than themselves.”
Elon Musk’s recent disclosure on the overwhelming challenges of the Cybertruck launch has sparked concerns over Tesla’s future. His admission paints a grim picture of the company’s path to volume production and profitability with the Cybertruck, calling into question the current valuation of the company.
The real question: is Tesla a tech company or an automaker?
Tesla, Inc. (NASDAQ:TSLA) is at a crossroads – is it a tech company or an automaker? The answer to this question shapes the valuation and future prospects of Tesla. Financials from the last three years indicate that automotive sales far outweigh energy generation and storage revenues, placing Tesla firmly within the auto manufacturing industry, which typically trades at low multiples.
This muses that despite its disruptive reputation, Tesla is a part of an industry with established market valuation criteria. This has raised doubts about whether Tesla’s stock price accurately reflects its true value or if it is overvalued.
Given the underlying dynamics, it becomes essential to scrutinize Tesla’s business operations and its stock valuation to gauge its true potential.
The harsh reality of competition
Recently, Mercedes-Benz Group AG (OTCPK:MBGAF) conveyed a chilling reality check for Tesla, highlighting the cutthroat nature of the EV market. The company’s management emphasized the fiercely competitive environment, citing aggressive price discounts by traditional players, posing a significant threat to Tesla. With a surging array of BEV models flooding the market, the future looks increasingly challenging for Tesla, with the forecasted erosion of its market share.
In a startling blow to Tesla’s autonomy dreams, Mercedes proudly boasted of achieving higher FSD certifications than Tesla, underscoring the escalating competition in the autonomous driving arena.
Even Volkswagen (OTCPK:VWAGY), the BEV market leader in Europe, shared disconcerting insights about the tepid reception of BEVs in the European market, signaling potential headwinds for Tesla’s ambitious growth plans.
Furthermore, Tesla’s aggressive pursuit of volume growth through price reductions has been a double-edged sword, with shrinking margins offsetting the gains from better scale.
The industry’s competitive pricing environment and Tesla’s strategic price cuts have aggravated its margin pressures, raising concerns about the company’s future profitability and sustainability.
These revelations about the headwinds faced by Tesla from its competitors throw into question the optimism surrounding the company and its stock, warranting a critical re-evaluation of its market positioning and growth prospects.
Electric Car Manufacturers Face Tough Market Amid Rising Prices and Stiff Competition
Electric car manufacturers are grappling with the harsh reality of a tough market. In a bid to grapple with the market realities, Tesla and Stellantis are making bold moves.
Stellantis’ Strategy Shines Amid Tough Competition
Stellantis (STLA) has ventured into the electric vehicle market with a winning strategy. The company announced in its latest earnings call that it is set to become the first major carmaker to offer a battery electric vehicle (BEV) in Europe, manufactured in Europe at a price below EUR 25,000. It also intends to launch an urban variant at just under EUR 20,000 by 2025. Stellantis is confident in the strong demand for these products and expects them to be profitable from day one.
While some manufacturers are struggling in this competitive landscape, Stellantis seems to be making headway in the BEV market.
Tesla Feels the Pinch of Rising Interest Rates
Tesla, on the other hand, is facing challenges as high interest rates are impacting consumer purchasing power. The company’s CFO addressed the issue during the recent earnings call, highlighting the need to adjust vehicle prices to keep monthly costs in parity due to substantially increased interest costs in the U.S.
Elon Musk, Tesla’s CEO, emphasized the impact of high interest rates, expressing concern that affordability is becoming a significant hurdle for potential buyers.
Closer Look at the Cybertruck
Tesla’s Cybertruck has been met with mixed reactions, with some expressing disappointment over the delayed launch and pricing. The entry price is 25% higher than initially indicated, raising questions about the vehicle’s affordability. The company’s sales targets for 2025 also raise skepticism, particularly when compared to competitor figures.
Tesla’s Financial Performance
Tesla’s financial metrics are showing signs of strain. While the company’s automotive revenues have seen growth, its profitability is being impacted, with decreasing net income, free cash flow, and consecutive quarter-on-quarter decline in operating margin.
Comparisons with its competitors show that Tesla’s performance is trailing, indicating a need for the company to address its margin challenges.
Challenges in Valuation
Tesla’s soaring valuation is raising concerns, with the company trading at immense premiums that are difficult to justify in the long term. The forward-looking P/E ratios indicate a concerning trend, especially in a market that is expected to become more competitive in the near future.
As electric car manufacturers navigate this tough market, bold strategies and a keen focus on affordability will be critical to success. Stellantis’ promising approach and Tesla’s challenges serve as a reminder that the road ahead is fraught with intense competition and economic headwinds.
Tesla’s Skyrocketing Valuation May Be Unsustainable, Warns Investment Analyst
Fueled by hype and volatility, Tesla’s meteoric rise in valuation has raised questions among investment analysts, with some warning of potential unsustainability. This cautionary advice comes amidst comparisons with well-insulated companies flaunting safer growth prospects and trading at more fair valuations.
Stellantis Outshining Tesla
Surprising to some, Stellantis has significantly outperformed Tesla in the past three years, delivering a whopping 106% return as opposed to Tesla’s 26%. The trend continues in the last year with Stellantis yielding a substantial 54% return compared to Tesla’s 23%. These metrics illustrate the stretched valuation of Tesla and its challenges in replicating its earlier extraordinary performance.
Comparing Tesla’s multiples to its peers reveals striking discrepancies, with Tesla trading at P/E ratios between 44 and 91, while its peers, except for Porsche, operate within the low- to mid-single digit P/E range. Amidst these disparities, questions surface regarding the reasonableness of the premium commanded by a company whose disruptive cars have failed to translate into margins surpassing 10%.
An insightful valuation analysis further diminishes the luster surrounding Tesla, as it suggests a considerable disparity. The analysis, based on bullish assumptions, contends that Tesla’s fair value should be a mere $42.35, starkly contrasting with its trading price of $240. Such analysis positions Tesla at a 13.6 earning multiple, already reflecting a premium compared to other automakers and placing it similarly to Porsche.
The cautionary sentiment surrounding Tesla’s valuation does not stem from a short-side investment perspective. Instead, it arises from a deep-seated concern that Tesla’s valuation may be unsustainable, given its heavy reliance on hype and volatility rather than robust fundamentals. Hence, a prudent recommendation emerges to facilitate a shift away from Tesla stock, capitalizing on current gains and redirecting investment towards more secure and high-quality opportunities for growth.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.