Growth Stock: Tesla Inc.

The falls that we have witnessed in the last days of the Tesla (TSLA.US) share, were quickly offset by the expected number of deliveries for the second quarter of the year. Due to the positive surprise of 5% above expectations and reaching an interannual variation of 83%. 466,140 vehicles were delivered in the period from April to June, increasing deliveries compared to the first quarter of 2023 by 10%.

Source: Reuters

Even with this good news, from a fundamental company perspective, its shares are still overvalued and Tesla's margins are shrinking due to Elon Musk's price-cutting strategy. This price-cutting strategy failed to boost demand significantly, and macroeconomic pressures continue to weigh on consumer spending. More recently, supply problems have sparked fears of lithium shortages. We are bullish on electric vehicle ("EV") alpha in the long term, but don't see stocks working out any time soon. We recommend investors explore exit points at current levels.

Margins and the threat of shrinking market share

Stocks have rebounded remarkably from their worst year ever, falling 65% in 2022, remember. Stocks have more than doubled this year, up 156% year to date, outperforming the S&P 500 (US500) index. by about 140%.

The chart below depicts the performance of Tesla's stock from 2022-2023.

Source: xStation

The company's gross margins are paying the price for Tesla's price-cutting strategy; The company reported a GAAP total gross margin of 19.3% compared to estimates of 22.4%, marking the lowest profit margin since 4Q20.

Musk favored higher sales over higher margins (growth over profits), but has recently been playing up prices again. Tesla's price cuts lowered the purchase costs of Model 3 and Model Y vehicles in the hope of boosting consumer demand in the face of macroeconomic headwinds restricting consumer spending.

While this price reduction strategy was also an attempt by Musk to retain and expand Tesla's share of the EV market. As competition intensifies and just after ratings agency Standard & Poor's estimated that Tesla's share would decline to less than 20% by 2025 from its impressive 79% share in 2020.

Interestingly, the company started raising prices for vehicles in May, including the Model 3 and Model Y, in the US, Canada, Japan, and China. Still, the price of Tesla's vehicles is still lower than it was at the beginning of the year. Tesla is visibly changing prices to react to the macro environment, and analyst consensus is that the company has launched a price war with the competition.

The bottom line, though, is that Musk's price cuts have failed to significantly boost demand; production still exceeded deliveries last quarter. The company's share of the electric vehicle market is also uncertain; Some analysts, such as those at Bank of America (BAC), estimate that the company's share will fall to 18% by 2026, a substantial drop from Tesla's share of 62% last year. Tesla has an oversupply problem as its production levels exceed deliveries for the past four quarters. The chart below depicts Tesla production vs. deliveries for 1Q23.

Tesla 1Q23 Production and Deliveries

In addition, we already know that when sales do not increase and price cuts are made, these put pressure on the margins per vehicle. The company's total gross margin profit has fallen year-on-year and quarter-on-quarter. Total auto sales revenue fell on a quarterly basis to $19.963 million from $21.307 million despite price cuts. Based on these numbers, the stock's rally is driven not by fundamentals but by market euphoria, primarily AI. Still, it is possible that Tesla could recover results during the second half of 2023. The chart below depicts Tesla's earnings for 1Q23.

Tesla 1Q23 IR

The chinese market

Tesla's business opportunity is expanding as electric vehicle adoption increases, also driven by regulations that encourage the public to transition from internal combustion engines (ICEs) to EVs. Electric vehicle market revenue is projected to grow at a CAGR (compound annual growth rate) of 10.07% between 2023 and 2028; Market expansion means more demand for Tesla but also more competition. The company faces tougher competition in Chinese markets from BYD Company, NIO (NIO.US), Li Auto (LI.US), XPeng (XPEV.US) and other EV start-ups. Of all Tesla revenues, 21% of these came from China in 1Q23, so intensifying competition in the Chinese market, currently the largest market for electric vehicles, requires investor attention.

Tesla 1Q23 10-Q. Figures in millions of dollars.

In his expansion process, Musk has also set his sights on India; the company executive met with India's prime minister to discuss the expansion, with India "driving the auto market to make a 'significant investment' in the country." The move could be very fruitful for Tesla and reduce the cost of producing cars, helping to maintain positive cash flow, but we still don't see saving the stock from near-term headwinds in 2H23.

Fundamentals

From a fundamental perspective, Tesla shares are overvalued and trading at unjustifiable base-premium multiples. On a PE (price to earnings) basis, the stock is trading at 51.4x for 2024 based on earnings per share (EPS) of $4.87 compared to the control group average of 19.7x. The stock is trading at 6.1x sales to company value (S/EV) for 2024 versus the peer group average of 3.3x.

So it doesn't look like Tesla is being fairly valued as a growth stock, as the high valuation takes into account future earnings in a tough macro environment, when Tesla's margins are under pressure. The market may be giving Tesla too much credit for its long-term prospects.

Comparison of fundamentals of the EV sector. source: TSP

What does Wall Street think?

The latest Wall Street analysis offers a surprisingly bearish view on Tesla. Of the 43 analysts covering the stock, 18 are rated as a Buy, 19 are rated as a Hold and the rest are rated as a Sell. Some analysts are revising their analysis of Tesla over the past month down; For example Goldman Sachs Group (GS) became the fourth to join the bears.

Price action

The stock is priced at $277.64 per share after posting its 2Q23 deliveries.

Source: xStation

And it is in the key resistance zone of the year. If it manages to hold recent gains it could look for the next control zone at the top of the $315/share range in 2022.

The company will offer its second quarter results at the close of the session on July 19.

Dario Garcia, EFA
XTB Spain