Tesla: Thinking Too Much to Deliver Meaningful Returns (NASDAQ: TSLA) | Private Equity Weekly

At the end of January this year, I published an article Tesla Inc. (NASDAQ: Tesla) outlines a rather pessimistic scenario that boils down to overvaluation relative to fundamentals.

already At that time, Fourth Quarter 2023 Results There are some signs that the road ahead is more challenging, with increasingly depressed margins and a significant slowdown in overall deliveries.

Additionally, the stock was down about 29% year-to-date at that time, which warranted speculation that there was a “once in a lifetime” dip buying opportunity before the market recognized that long-term growth potential could be supported by gradual improvements. Financial status.

Well, the production and shipments that have been rumored recently Statistical data It paints a clear picture of the ongoing pressure within Tesla’s business to register returns that meet the market.For example, consider quite Strong double-digit growth in deliveries was expected due to higher valuations, but data for Q1 2024 show a negative dynamic rate, with the total number of cars delivered falling by approximately 10% compared to Q1 2023 9%. Compared to the previous season, the numbers were down an astonishing ~20% (although we have to account for seasonal effects in this comparison). As will be described below, Tesla’s deliveries face several significant headwinds, such as increased Chinese and global competition, technical difficulties, and a general slowdown in EV growth.

As a result, the stock fell further, reaching a negative return of about 33% year-to-date.

However, if we look at how some buy-side analysts reacted to this, we wouldn’t notice any major changes in their sentiments about the company.

For example, Morgan Stanley decided to maintain an overweight rating. ARK Invest’s Cathie Wood saw this as an opportunity to take advantage of the overreaction and bought over 240,000 shares of TSLA on the dip.

It’s also interesting to look at the consensus EPS trajectory from the perspective of how analysts are pricing foreseeable future earnings growth.

Despite near-term challenges with financials in the fourth quarter of 2023 and deliveries in the first quarter of 2024, as well as deteriorating industry (electric vehicle market) dynamics, investors expect EPS to grow by approximately 40% in 2025, followed by Earnings per share will continue to grow by about 20% in 2026 and 2027.

Interestingly, some reality is starting to set in, as some EPS contraction this year is widely expected, which could hint at that. However, there is still an assumption that starting in 2025, the story will suddenly go in the completely opposite direction and Tesla will manage to make a comeback.

where is the problem?

The overarching problem with all of this is that Tesla currently trades at a very high valuation multiple. Whenever you do this kind of aggressive pricing from multiple angles, the company has to really demonstrate strong financials or clearly embody its characteristics to send a message that future growth is going to be significant. Still, given that the drivers of Tesla’s growth are fading and seeing their negative impact seep into the company’s books, the overall level of speculation (i.e. the likelihood that Tesla will actually meet or exceed expectations) There has been an increase.

Based on P/FCF calculations, Tesla’s price-to-earnings ratio far exceeds that of most peers. Even compared to Apple (NASDAQ: AAPL ), which has been widely linked to the potential of embedded artificial intelligence but already generates a lot of cash, Tesla is much more expensive. I think investors must decide first whether Tesla’s current bets on artificial intelligence (e.g., fully self-driving cars, robo-taxis, Optimus autonomous robots, and its Dojo supercomputer) will come to fruition and second. Whether they are really successful, whether there will be a situation of underlying business. Of course, if both of these elements come true, Tesla will have every reason to grow rapidly. However, I’m skeptical for the following reasons:

• Large-scale implementation of FSD and robo-taxi would require significant regulatory approval, which is itself a speculative and obviously time-consuming process.
• In order to profit handsomely from these investments, you must have a small playing field to penetrate the technology while charging exceptional profits to justify the long-term investment. Given what we’re seeing among our peers, and given the pace of technological advancement at several Asian automakers, I don’t think we can take Tesla’s bet on market entry for granted.
• Ultimately, what it comes down to is Tesla’s going to come down to cash generation to justify its price-to-earnings ratio and generate solid returns from its AI-related investments. Here, we don’t have any benchmarks or directly comparable data points to evaluate Tesla’s performance. However, given the dynamics of its core business, which has led it to lead before any other serious competition emerged, we again can’t take stable profits for granted. So far, we haven’t seen Tesla capitalize on its core EV business by delivering strong and growing free cash flow. Conversely (discussed below), we can see that free cash flow is contracting.

Additionally, Tesla’s P/FCF is simply astronomical in absolute terms, with a P/E ratio of about 60x, which introduces a very difficult foundation for achieving or exceeding future alpha.

In the chart below, we can nicely notice the valuation gap between Tesla and Apple, as well as other selected automakers. The key takeaway here is simple: Whether it’s a traditional car maker (including electric cars) or an AI-focused company like Apple (with more cash to spend on developing AI potential), it’s easy to conclude that special Sla’s pricing is perfect. For example, a company like Ford (NYSE:F), which has enough capital to pay out dividends and invest capital directly into R&D activities, trades at more than 15x lower than Tesla’s P/FCF multiple, despite Tesla’s current large Some of the cash also comes from the car production business (which is struggling now). This just goes to show how big the “artificial intelligence-related” premium is in Tesla stock.

However, after seeing deterioration in financial performance, further weakness in deliveries, and taking into account the broader economic (including geopolitical) backdrop, the above multiples appear extremely stretched. Additionally, it seems unlikely to me that Tesla will achieve the EPS targets that the market is pricing in.

Let’s keep in mind that Tesla’s adjusted EBITDA is about 13% negative (year-over-year) in 2023 due to margin compression at the gross profit and operating income levels, while total revenue is up slightly. In other words, profits fell even though sales growth should, at least in theory, benefit profits through economies of scale (because Tesla has a lot of fixed costs). This is actually a combination of unit price pressure and a general increase in cost input factors.

If we add in the fact that first-quarter deliveries were equally weak, then it clearly sends a signal that Tesla’s ability to convert sales revenue into tangible cash flow and earnings isn’t going to gain much from a revenue perspective It’s really important for investors to support this.

In addition, China Accounts for 22% of Tesla salesThis market is increasingly difficult for foreigners to enter.

except the most recent remember There is growing discussion about how the Chinese government can take deliberate action to support domestic electric car makers, from subsidies to direct support, after the country’s roughly 2 million vehicles were determined that some self-driving features were too confusing and too easy to abuse.Entrance limit in more government-affiliated locations).

It’s no secret that Tesla’s market share in China has experienced unpleasant dynamics of late, with domestic companies such as BYD Corp ( OTCPK: BYDDF ), Li Auto ( LI ), NIO ( NIO ) and Xpeng Motors ( XPEV ) taking action The necessary measures have been put in place (my guess, but most likely directly supported by the local government in a meaningful and coordinated way), mainly through price reductions to make their model more attractive to locals. For example, BYD is not only Tesla’s most important competitor in China, but also increasingly becoming Tesla’s most important competitor globally, and the company has begun to make multiple price cuts for most of its models (e.g., its The price of the best-selling model Yuan plus crossover is reduced by 12%). overseas market).There is another company expect Price cuts will continue in 2024, which will further put downward pressure on Tesla’s ability to achieve sales growth (of course, to the extent that it would justify the multiple).

Beyond that, let’s not forget about foreign exchange risk.

The U.S. dollar has appreciated sharply against the yuan over the past two years, and even from a year-to-date perspective, the appreciation trajectory is still not conducive to export companies such as Tesla. While it’s difficult to predict where this pair will go, it just introduces additional risk into the equation, making the market’s EPS expectations a more challenging target.

Finally, it’s worth highlighting the fact that competition in the EV space is indeed increasing across the board as historical capital spending commitments begin to deliver meaningful results on a larger scale.

For example, the very long list of new electric vehicles coming to market (the above reflects a non-exhaustive list of 2024 models) gives consumers a wider range of choices and makes Tesla’s selectivity less dominant.

bottom line

Simply put, Tesla’s price-to-earnings ratio is too aggressive, leading to strong underlying growth. We can also notice this by looking at consensus EPS forecasts for the foreseeable future, which paint a picture of solid double-digit EPS growth going forward. Here, if Tesla fails to achieve these metrics, the stock price will inevitably fall, and most likely significantly because the valuation is very high.

Based on production and delivery statistics for the first quarter of 2024, along with the new difficulties emerging in the Chinese market and increased competition across the board, I just don’t see how Tesla can achieve profitability based on what the market has factored into current valuations.

Therefore, I still maintain my rating unchanged and do not recommend going long. At the same time, shorting Tesla is too speculative because history shows that valuations and their performance against the backdrop of fundamentals often don’t care about the market at all. There is additional risk that any positive news surrounding any AI-related bets could push stocks higher from here (e.g., smooth adoption of robotaxis, a quick and successful MVP of Optimus Prime autonomous robots, or even a sudden reversal in momentum) in China market). However, artificial intelligence and investment in currently untapped technologies are inherently unpredictable, and sales in China are not showing any signs of recovery, but the opposite. To me, it implies too much speculation given Tesla’s overvalued valuation.