Tesla (NASDAQ:TSLA) is in trouble. The company is, unfortunately, starting to deal with the effects of growth at all costs. It has substantial costs, increased competition, and now the chance of losing one of its largest markets. As we’ll see throughout this article, the company is, in our view, fighting for survival at this time.
Tesla versus California
It’s no secret that California likes to protect its citizens over businesses. The state lost Tesla’s headquarters there over enforcing COVID-19 work restrictions in a battle with local cities. Now, California is aiming to revoke the company’s dealer license over deceptive marketing claims. That’s not surprising to us. In fact, we’re surprised this didn’t come earlier.
As recently as 2019, the company’s eccentric CEO was promising autonomous taxis on the road by 2020. Of course, that target has come and gone. Here’s what Elon Musk said in April 2019:
April 22 – Musk says that in 2020, Tesla will have “over a million cars with full self-driving, software, everything.”
April 22 – Musk says it is “financially insane to buy something other than a Tesla” today because Tesla is the only company to have a full self-driving suite of hardware.
The results of the fight with California remain to be seen, and there’s no denying that oftentimes, the punishment is much less than the initial headlines. However, with California still representing roughly 12% of the company’s market share, there’s a lot of risk here to the company. It’s a much smaller player in the rest of the United States.
Tesla had mediocre earnings given the company’s almost $1 trillion valuation.
The company reported $2.5 billion in annualized FCF and $2.3 billion in GAAP net income. That gives the company an almost triple-digit P/E. It’s worth noting that these numbers don’t count the company’s stock-based compensation, numbers that continue to increase, and the company continues to compete in a tough hiring market.
The company reported roughly 35 million in new outstanding shares over the past year. The company’s stock-based compensation is billions of dollars per year. That compensation number alone is above the company’s entire cash flow and its outstanding share growth is more than all of that. That’s a true expense that’ll need to be factored in someday.
Tesla is now a giant with an almost trillion-dollar market cap. Half a decade ago, that valuation would make it the largest company in the world. In our view, the company needs to start earning substantial profits to justify its valuation.
At the same time, Tesla’s competition is rapidly growing.
That’s bad news for a company struggling to maintain its current positioning. The company has announced the price of the Cybertruck is going up, although it hasn’t given new details. It’s announced that it’s aiming for 2023 volume ramp, but that’s still a maybe, while Ford (F) has announced it expects a run rate of 150 thousand F-150s / year by 2023.
China’s BYD (OTCPK:BYDDF) (backed by Berkshire Hathaway) is now a larger EV company than Tesla, even if it doesn’t sell vehicles in the US. That’s despite having only 15% the valuation of Tesla. The company’s continued growth means that, worst case, it’ll be eating away Tesla’s lunch in China. That risk will continue to eat away the company’s market share as it struggles to bring up its Shanghai factory.
Tesla Supply Chain Issues
Another problem is supply chain issues.
Every company is simultaneously chasing EVs, dumping in billions of dollars if not 10s of billions. That’s going to put significant stress on EV supply chains. Shortages are expected to be much more commonplace by the middle of the decade. By the late-2020s, the EV vehicles themselves rather than just the batteries are expected to see shortages.
Don’t get us wrong. Humanity is incredible at solving problems when 10s of billions of dollars go to the victor. The problem for Tesla, as electrification grows, and gigafactories grow, is that its differentiators go down. If Tesla can’t produce enough batteries by itself, it will need to go to the same customers as everyone else, reducing the value-add of its cars.
Supply chain issues mean that the company will be limited by its max production, which will hurt growth, and give competition a time to establish a foothold. Existing vehicle manufacturers have much stronger supply chains than Tesla.
Tesla Other Businesses
Customers always point to Tesla’s other businesses as a source of value, but we think that’s minimal at best. At worst, they’re a source of capital the company needs.
The solar-tile that the company originally announced to much fan-fair as an aesthetic replacement to solar panels is dead. The company has a mere 2% market share in the solar panel market as a result of a multi-billion dollar investment. The self-driving might be a negative for the company’s business versus a plus given recent news.
The company spends billions developing the software, but it’s not even competitive with other self-driving competitors, let alone actually solving the problem. Powerwall storage is perhaps the only useful business, but we expect it to be ignored as a supply chain crisis makes batteries instead be redirected towards cars.
Our valuation for the company’s other businesses, at this point, is near 0.
Tesla’s No Baby
At the end of the day, the takeaway we expect for investors is that Tesla is no longer a baby. The company isn’t an up-and-coming start-up with a few billion-dollar market cap trying to make things work. It’s a $900 billion company and one of the largest companies in the world. It’s no longer time to struggle, it’s time to start making profits and rewarding shareholders.
The company needs to be making $10s of billions in profits to justify its valuation. It’s nowhere remotely close to that. Taking into account real costs means the company’s FCF is negative and competition is only growing from here. It’s no longer the largest EV company. We expect the company to stay around as a long-term company but at nowhere near its current valuation.
The Last Crash
There’s one other aspect that we feel Tesla shareholders haven’t taken into account.
Tesla hasn’t been through a true recession, with the company’s scale dramatically smaller during the 2008 market collapse. During the 2008 market collapse, 2 of the big 3 U.S. automakers needed federal bailouts, and the last, Ford only avoided a similar faith because of >$20 billion it had raised in 2006 with incredible timing.
Tesla has talked about how new factories are losing billions, but the company’s financials are protected by strength from other factories. Teslas are considered luxury cars, which means for customers looking to get from point A to point B as quickly as possible, they’re not the first choice. The company also has a small used car market.
Putting that all together, it’s tough to put numbers, but we think the company’s financials could deteriorate rapidly in a downturn. Given that the company was a month from bankruptcy during the Model 3 ramp, and by many metrics, we might be in a recession, that storm might be coming sooner than thought.
The largest risk to the thesis is a volatile and consolidating market. Building a new car company is one of the hardest industries to enter. New competitors like Rivian (RIVN) and Lucid (LCID) have suffered significantly in their market caps and could go bankrupt if they fail to generate profits. That will help cement Tesla’s market position.
Tesla is now one of the largest companies in the world. However, the company is no longer the largest EV producer with BYD snagging that spot. It’s not the leader in the launch of EV companies. And its Cybertruck price is expected to go up with ramp yet to be seen, while competition remains significant from Ford and Rivian.
The company is making profits; however, it’s ignoring share-based compensation expense, which is more than its FCF. The company is no longer young, it needs to start ramping up shareholder rewards and cash flow. Putting that together, we recommend against investing in Tesla at the given time at the current valuation.