It was not that long ago when a dwindling but persevering band of Tesla short-sellers would receive near-constant tirades for having entered into a widow-maker trade. No Longer. The patina of invincibility has truly come off Tesla shares, especially after the EV giant's lackluster earnings for the third quarter of 2023, prompting the analysts at Bernstein to go so far as to label Tesla a run-of-the-mill auto company operating in an industry that does not allow "volume participants to have sustained outsized margins.”
Tesla shares are down nearly 15 percent over the past five trading days. Now, one hedge fund's CIO asserts that Tesla's fundamentals can merit a stock price of just around $85 or a market cap of around $300 billion.
Tesla's List of Travails is Growing Again
Tesla failed to meet consensus analyst expectations regarding its top-line and bottom-line metrics in Q3 2023, hammered by a steep drop in its auto gross margin (ex-Regulatory Credits), which declined from 26.7 percent in Q3 2022 to just 16.3 percent in the just-concluded quarter on the back of significant price cuts that the EV giant instituted in several key markets.
Moreover, Tesla's interim CFO, Vaibhav Taneja, could provide no visibility on whether Tesla's auto gross margin (ex-RC) has, in fact, hit a cyclical nadir. Elon Musk, however, dropped the most potent cudgel during the earnings call when he noted that volume production of the Cybertruck would probably only materialize in 2025. With investors counting on the electric pickup truck as a panacea for combatting the persistent demand weakness for Tesla vehicles, this tempering of expectations could not have come at a worse time.
DOJ investigations that have gotten to the stage of issuing subpoenas: 1) FSD/Autopilot (Fraud/Negligent Homicide?), 2) Embezzlement (including related party self dealing and Musk perks), 3) Vehicle range (Fraud), and 4) Personnel decisions (racist hiring and promotions?)$TSLA https://t.co/VVdaio6iHt
— JC Oviedo (@JCOviedo6) October 23, 2023
Tesla's Form 10-Q filings today have unveiled another bout of troubling developments. First, the Department of Justice has now subpoenaed the EV giant in order to obtain additional information in its ongoing investigations into Tesla's Autopilot and FSD features, Elon Musk's purported misappropriation of company resources, alleged fraud related to the manipulation of vehicle range, and the ostensible racial bias in some of the company's hiring decisions.
Not everyone seems to get it. They upgraded the factory so much that its value dropped.
— fly4dat (@fly4dat) October 23, 2023
In another ominous development, despite engaging in aggressive factory upgrades, especially in China, Tesla has now marked down its long-lived assets in the Asian giant.
Fundaments vs. Hopium
Precisely five years ago, Tesla traded for $19.61 per share. At the time, the consensus 2023 EPS expectation for $TSLA was $2.81. Today, it is $3.16, or 12% higher.
The stock, however, is up nearly 1000% to $212.
A thread...
— Drew Dickson (@AlbertBridgeCap) October 23, 2023
This brings us to the crux of the matter. Drew Dickson, the CIO of Albert Bridge Capital, has now penned an exhaustive thread on the chronic mismatch between Tesla's fundamentals and its elevated stock price, driven in large part by copious amounts of retail investor-driven buzz.
Tesla's forward earnings between 2018 and 2023 increased from $2.81 to $12.24 per share, constituting an increase of 336 percent. If the company's stock had grown in line with the forward EPS estimates, it would have been trading at around the $85 price level right now, as per the tabulation by Dickson. Yet, the stock is currently trading north of $200, indicating that around 70 percent of the gains in Tesla shares over the past 5 years were driven by "hopium."
Even at a stock price of $85, Tesla would have been trading at a still-generous P/E multiple of 27x, given the high likelihood of a 20 percent contraction in its EPS in 2023 and staring down the barrel of another potentially negative year in 2024.
Morgan Stanley's Adam Jonas conceded in a recent investment note that, in the absence of a dedicated Cybertruck-related tailwind, many institutional investors believe that Tesla will have to continue to rely on additional price cuts to "clear inventory," as per the management's own comments during the April earnings call. Institutional investors also remain skeptical as to whether Tesla would be able to grow its earnings at all in 2024, with the impact of the Dojo supercomputer and the EV giant's AI/FSD-related efforts "difficult to quantify, and easy to ignore."
Against this backdrop, Dickson's analysis looks increasingly pertinent in explaining the ongoing moderation in the froth around Tesla shares.
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