Tesla, Inc.'s second quarter earnings confirm our view that the stock is one of the most overvalued stocks in the market.
Tesla's stock has been rising this year amid a sudden shift in overall market sentiment, with many investors now pricing in a soft-landing scenario after a brutal past year of Federal Reserve rate hikes. But the shift in market sentiment doesn't change the fact that Tesla's stock fundamentals are completely disconnected from reality. Tesla is a terribly overvalued stock that we think is worth closer to $26 per share instead of its current price of about $290 per share.
While Tesla is profitable, its profits are nowhere near the levels needed to justify its current valuation. We recognize that Tesla's business generates an impressive return on invested capital (ROIC), which is a key measure of profitability, especially for an automaker. However, that ROIC is already declining in the trailing-twelve-month (TTM) period.
Using our reverse discounted cash flow (DCF) model, we find that for the stock to have any upside at current levels, Tesla must improve its ROIC to levels not achieved by even the most profitable businesses in the world. Figure 1 shows Tesla's historical ROIC along with the future ROIC implied by its current stock price. We provide the assumptions behind this DCF scenario later in this report.
Tesla's latest earnings continue to show that it is not immune to competitive challenges and will likely see lower profitability in the future. But, its valuation implies the opposite. Any investor with fiduciary duties should be aware of the growing disconnect between Tesla's current fundamentals and the future fundamentals implied by its stock price. Even in an optimistic future cash flow scenario, shares could trade as low as $26/share. All the details are below.
Supply Constrained Argument Is Gone: Bulls have long argued that demand for Tesla vehicles has always exceeded the supply of vehicles. However, Tesla's multiple price cuts in 2023, along with its lackluster production levels through the first half of 2023, raise questions about just how much demand there is for Tesla vehicles, especially amid competition from rivals Ford (F), General Motors (GM) and virtually every other automaker. Q2 2023 marks Tesla's fifth consecutive quarter in which vehicles produced were greater than vehicles delivered. Tesla is no longer selling every vehicle it can make. Should demand for EVs slow, Tesla could find itself with higher than wanted inventory levels, which could lead to further price cuts and additional pressure on already falling margins.
Continued Cash Burn: Despite Tesla's top line growth, it continues to burn massive amounts of cash. Over the past five years, Tesla has burned a cumulative $4.2 billion in free cash flow (FCF), including $3.6 billion over the trailing-twelve months (TTM) alone. Tesla has generated negative FCF in all but one year (2019) of its existence as a public company.
Margin Decline: Tesla's "GAAP gross margin" was 18.2% in 2Q23, down from 19.3% in 1Q23 and 25.0% in 2Q22. 2Q23's GAAP gross margin was below expectations of 18.7% and remains at its lowest level since 4Q20.
Tesla's operating margin is also moving the wrong direction as it scales up. After selling 211 thousand more vehicles in 2Q23 compared to 2Q22, Tesla's reported operating margin fell 493 basis points YoY in 2Q23. Tesla noted in its press release that reduced average selling prices were one of the items that impacted margins in the quarter. We would expect Tesla's margins to fall further as competition limits pricing power across the industry.
While Tesla has rapidly ramped up vehicle production and deliveries, its market share must increase almost exponentially to justify the expectations baked into its stock price. However, as it stands, Tesla holds a meager share of the global auto industry, and its share of the EV market ranks behind incumbents across Europe and China.
In Europe, based on sales from May 2023, Tesla holds a 12% share of the EV market, much lower than VW Group (20%) and Stellantis (STLA) at (14%).In China, also based on sales from May 2023, Tesla holds 9% of the EV market compared to a staggering 38% share for top competitor BYD.
Bulls have long argued that Tesla isn't just an automaker, but rather a technology company with multiple verticals such as insurance, solar power, housing, and, yes, robots. We've long refuted these bull dreams. Regardless of the promises of developing multiple business lines, Tesla's business remains concentrated in its auto segment. Auto revenue accounted for 86% of Tesla's TTM revenue as of 2Q23.Tesla can no longer enjoy its first mover advantage as many other major automakers are producing electric vehicles. These competitors have more experience in auto production and more resources and cash flow than Tesla to invest in the electric vehicle market.
Tesla is at risk of losing market share to its competitors in the electric vehicle space and its stock price is currently not reflecting that, which is a major risk for investors.
Since bottoming out at the beginning of the year, the stock has come up almost 200%, stopping just shy of $300.
One could say the recent selloff is due to the earnings, but technical analysis would have suggested that a selloff was due even before the earnings.
Firstly, we can see that a significant bearish divergence has been building in the RSI since June. Furthermore, we have been nearing an important area of trade as highlighted by the red rectangle. The $300 level has been a key area of trade, and you’d expect to see some resistance.
So if a pullback has begun where can we expect it to end?
As I see it, we have formed an initial ABC structure from the lows in wave 1 of a five-wave impulse. This means that wave ii could now take us down to the 61.8% retracement of this rally, which lands us at $198.
We can see that this is also a very important area of support, as shown by the Visible Range Volume Profile. And, of course, we have the 200 day Moving Average offering support around this level, too.
Tesla's stock has been rising this year amid a sudden shift in overall market sentiment, with many investors now pricing in a soft-landing scenario after a brutal past year of Federal Reserve rate hikes. But the shift in market sentiment doesn't change the fact that Tesla's stock fundamentals are completely disconnected from reality. Tesla is a terribly overvalued stock that we think is worth closer to $26 per share instead of its current price of about $290 per share.
While Tesla is profitable, its profits are nowhere near the levels needed to justify its current valuation. We recognize that Tesla's business generates an impressive return on invested capital (ROIC), which is a key measure of profitability, especially for an automaker. However, that ROIC is already declining in the trailing-twelve-month (TTM) period.
Using our reverse discounted cash flow (DCF) model, we find that for the stock to have any upside at current levels, Tesla must improve its ROIC to levels not achieved by even the most profitable businesses in the world. Figure 1 shows Tesla's historical ROIC along with the future ROIC implied by its current stock price. We provide the assumptions behind this DCF scenario later in this report.
Tesla's latest earnings continue to show that it is not immune to competitive challenges and will likely see lower profitability in the future. But, its valuation implies the opposite. Any investor with fiduciary duties should be aware of the growing disconnect between Tesla's current fundamentals and the future fundamentals implied by its stock price. Even in an optimistic future cash flow scenario, shares could trade as low as $26/share. All the details are below.
Supply Constrained Argument Is Gone: Bulls have long argued that demand for Tesla vehicles has always exceeded the supply of vehicles. However, Tesla's multiple price cuts in 2023, along with its lackluster production levels through the first half of 2023, raise questions about just how much demand there is for Tesla vehicles, especially amid competition from rivals Ford (F), General Motors (GM) and virtually every other automaker. Q2 2023 marks Tesla's fifth consecutive quarter in which vehicles produced were greater than vehicles delivered. Tesla is no longer selling every vehicle it can make. Should demand for EVs slow, Tesla could find itself with higher than wanted inventory levels, which could lead to further price cuts and additional pressure on already falling margins.
Continued Cash Burn: Despite Tesla's top line growth, it continues to burn massive amounts of cash. Over the past five years, Tesla has burned a cumulative $4.2 billion in free cash flow (FCF), including $3.6 billion over the trailing-twelve months (TTM) alone. Tesla has generated negative FCF in all but one year (2019) of its existence as a public company.
Margin Decline: Tesla's "GAAP gross margin" was 18.2% in 2Q23, down from 19.3% in 1Q23 and 25.0% in 2Q22. 2Q23's GAAP gross margin was below expectations of 18.7% and remains at its lowest level since 4Q20.
Tesla's operating margin is also moving the wrong direction as it scales up. After selling 211 thousand more vehicles in 2Q23 compared to 2Q22, Tesla's reported operating margin fell 493 basis points YoY in 2Q23. Tesla noted in its press release that reduced average selling prices were one of the items that impacted margins in the quarter. We would expect Tesla's margins to fall further as competition limits pricing power across the industry.
While Tesla has rapidly ramped up vehicle production and deliveries, its market share must increase almost exponentially to justify the expectations baked into its stock price. However, as it stands, Tesla holds a meager share of the global auto industry, and its share of the EV market ranks behind incumbents across Europe and China.
In Europe, based on sales from May 2023, Tesla holds a 12% share of the EV market, much lower than VW Group (20%) and Stellantis (STLA) at (14%).In China, also based on sales from May 2023, Tesla holds 9% of the EV market compared to a staggering 38% share for top competitor BYD.
Bulls have long argued that Tesla isn't just an automaker, but rather a technology company with multiple verticals such as insurance, solar power, housing, and, yes, robots. We've long refuted these bull dreams. Regardless of the promises of developing multiple business lines, Tesla's business remains concentrated in its auto segment. Auto revenue accounted for 86% of Tesla's TTM revenue as of 2Q23.Tesla can no longer enjoy its first mover advantage as many other major automakers are producing electric vehicles. These competitors have more experience in auto production and more resources and cash flow than Tesla to invest in the electric vehicle market.
Tesla is at risk of losing market share to its competitors in the electric vehicle space and its stock price is currently not reflecting that, which is a major risk for investors.
Since bottoming out at the beginning of the year, the stock has come up almost 200%, stopping just shy of $300.
One could say the recent selloff is due to the earnings, but technical analysis would have suggested that a selloff was due even before the earnings.
Firstly, we can see that a significant bearish divergence has been building in the RSI since June. Furthermore, we have been nearing an important area of trade as highlighted by the red rectangle. The $300 level has been a key area of trade, and you’d expect to see some resistance.
So if a pullback has begun where can we expect it to end?
As I see it, we have formed an initial ABC structure from the lows in wave 1 of a five-wave impulse. This means that wave ii could now take us down to the 61.8% retracement of this rally, which lands us at $198.
We can see that this is also a very important area of support, as shown by the Visible Range Volume Profile. And, of course, we have the 200 day Moving Average offering support around this level, too.
