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All on Thu Dec 15 17:46:27 2022
Half-Price Tesla Stock Is Still No Bargain
Even after a roughly 50% decline this year, the electric-vehicle pioneer’s shares are pricing in an unusual level of industry dominance
Tesla shares have roughly halved this year.
Electric vehicles are often described as iPhones on wheels. After a horrible few months for Tesla TSLA 0.55%increase; green up pointing triangle shareholders, the question is just how far the comparison goes.
Tesla shares have roughly halved this year, worse than most of the EV maker’s big peers in both the auto and tech industries. Much of the underperformance has come in the past three months, amid two broad concerns. One is that demand for its products
is no longer racing ahead of increasing supply, particularly in China. The other relates to risks surrounding Chief Executive Elon Musk’s purchase of Twitter, which came together in October.
The past week has been particularly bad for demand worries. Following earlier news that the company has been cutting prices and offering sales incentives in China, Bloomberg and Reuters reported that it was planning to trim production at its Shanghai
factory. Tesla denied the reports, but Bloomberg followed up with details of shorter production shifts.
Lower output isn’t completely surprising given that EV sales in China have been on a hot streak ahead of the expiration of some government subsidies, potentially leading to a hangover next year. Still, the news plays into fears that Tesla’s prospects
in the world’s largest car market aren’t quite as spectacular as hoped.
Meanwhile, Mr. Musk’s chaotic turnaround of Twitter can be seen variously as a management distraction, a financial liability that needs to be funded by sales of Tesla shares or loans to Mr. Musk backed by those shares, a political hot potato that doesn
t sit well with a global mass-market car brand, and generally a high-risk, high-profile enterprise that could take the shine off Mr. Musk’s reputation and by extension Tesla’s brand.
These risks are hard to relate directly to profit, but so is Tesla’s valuation: The stock has always been hard to explain in terms of so-called fundamentals. This year’s selloff has made it easier, though.
Tesla shares now trade at about 32 times next year’s FactSet consensus earnings—higher than most stocks but close to the lowest number in their history. Also, earnings per share are expected to grow rapidly, by 41% next year. Compare the earnings
multiple with the earnings growth and you get a so-called price-earnings-growth or PEG ratio below one, often a signal that a stock is undervalued. This may be the first time Tesla shares have ever screened as cheap according to a conventional valuation
metric.
The catch is that earnings growth needs to remain very rapid for the metric to hold much meaning. The big valuation question for Tesla investors is therefore how easily it can carry on ramping up output while maintaining the current high level of
profitability. The only reasonable answer is: not at all easily. Crucially for bulls, though, the dream scenario is just about imaginable if you look at the company from the mobile-phone industry’s perspective.
If EVs are like smartphones, Tesla can be seen as the next Apple. In the years after the iPhone’s invention, investors gave the product’s inventor a low valuation because they assumed its profit would fall in line with those of other device makers.
As it turned out, the iPhone could be parlayed into an entire ecosystem, including subscriptions and other high-margin software, that has kept Apple’s profit for the most part growing.
Tesla teases the parallel with its guidance that, “over time,” profit from selling cars will be accompanied with “an acceleration of software-related profit.” The big hope here is driver-assistance software, with the company already charging $15,
000 for its most advanced package.
The Apple comparison, which Mr. Musk made directly in Tesla’s third-quarter earnings call, has enough substance to keep plenty of Tesla fans onside. But it ignores important differences. Perhaps the most fundamental one is that choosing a car brand has
long been a form of personal expression, leading to a variety of brands and vehicle types. Will that change as cars go digital, with individual app and software preferences replacing differences in brand and styling? Maybe, but it is a bet against a
century of automotive history.
More likely, Tesla’s ambition to increase vehicle deliveries consistently by 50% a year will dilute its margins. Today, these are high because it makes few models on a large scale and sells them for premium prices, helped by the shortage of vehicles in
general and EVs in particular. Neither shortage will last forever, and Tesla’s own growth will undercut the combination of exclusivity and operational simplicity that support its current financial performance.
As for software, Tesla continues to struggle with its project to automate driving in a way more than a few of its biggest fans might be prepared to pay meaningful sums for. It isn’t alone: The entire industry hasn’t made as much progress toward
commercializing self-driving technology as it once hoped. Even if a breakthrough emerges, there is little reason to think Tesla would make it. It doesn’t appear to have a lead over Intel’s Mobileye, which supplies competitors. Recent hints that Tesla
might return to using radar, a tool it previously rejected, underline the point.
Even at half-price, investors need to make some very bold assumptions to see value in Tesla’s stock.
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