Tesla is Running On Fumes

Tesla was among the hottest stocks in the past decade since the electric vehicle manufacturer went public in 2010. Between July 2010 and November 2021, Tesla stock surged over a whopping 32,000%. However, in the last two years, TSLA shares are down by 50%, valuing it at $660 billion by market cap.

Let’s dive deeper to see why the EV giant is grossly underperforming the broader markets.

Macro Headwinds and More

Similar to other companies, Tesla has been wrestling with a range of issues in recent quarters. These include:

👉 Rising interest rates: Higher bond rates increase the cost of debt for companies and households, which results in lower profit margins and lower consumer spending.

👉 Inflation: Elevated inflation has eroded the profit margins of companies while reducing discretionary spending for households.

👉 Supply chain disruptions: Chip shortages hampered sales for Tesla and its peers during COVID-19 lockdowns.

Tesla Misses Estimates in Q3

In Q3 of 2023, Tesla reported:

• Revenue of $23.35 billion vs estimates of $24.1 billion

• Earnings of $0.66 billion vs. estimates of $0.73 per share

While sales were up 9%, earnings narrowed by 37% compared to the year-ago period. Moreover, gross profits were down 22%, and operating profits declined 52%. What does this say?

It indicates Tesla no longer enjoys pricing power, and the company is struggling to maintain demand in the current environment.

Tesla’s CEO Elon Musk emphasized he remains worried about rising interest rates as it has increased the cost of debt significantly. Moreover, Tesla confirmed the production of the Cybertruck remains on track, with first vehicle deliveries scheduled for November 30^th .

Currently, the Texas factory can manufacture 125,000 Cybertrucks each year, and this segment will remain unprofitable for at least a year post-production.

Tesla continues to expand its portfolio of battery-powered vehicles, but rising competition from new-age players and legacy manufacturers is also acting as headwinds for the company.

Tesla’s Profit Margins Remain Under Pressure

Tesla was an early mover in the EV segment and increased manufacturing capabilities significantly over time to benefit from economies of scale. Prior to 2022, Tesla enjoyed a period of economic boom, lower interest rates, and no competition.

This allowed Tesla to end 2022 with an industry-leading operating margin of 17%. But in Q3, the company’s:

• COGS increased by 18%

• Free cash flow declined by 74%

• And GAAP EPS fell 44%

To combat a sluggish economy, Tesla has reduced average selling prices of its vehicles, driving profit margins lower. The launch of the cybertruck, investments in artificial intelligence, and other research and development projects are weighing on the bottom line.

Legacy Auto Manufacturers Are Cautious

Compared to internal combustion engines, EVs are costly, and a higher pricing environment has drastically lowered consumer demand in the past year. Legacy auto manufacturers such as Mercedes-Benz and Ford are selling EVs at a loss and are slowing EV investments to reduce cash burn.

Ford claimed customers are no longer willing to pay a premium for EVs and has postponed $spending worth $12 billion, which was allocated toward the EV segment.

In Q3, Ford’s EV sales were up 26%, while operating losses surged 100% to $1.3 billion.

Tesla Stock Likely to Move Lower

Analysts expect Tesla’s:

• Earnings to fall by 26% to $3 per share and

• Sales to surge by 13% to $92 billion in 2023

Priced at 70x forward earnings, Tesla stock is similar to its line-up of EVs- expensive and unaffordable. The company is also wrestling with competition from new-age players such as Nio and Byd, as well as established players, including Ford and GM.

If Tesla ends 2023 with $3.2 billion in free cash flow and increases the metric by 30% to $4 billion in 2024, the stock should be valued at $400 billion, even if we assume it trades at 100x future cash flow. It suggests a drawdown of over 40% from current levels.

Taylor Swift Enters Billionaire Era

Taylor Swift’s net worth is around $1.1 billion, according to Bloomberg. The pop star has dominated the cultural landscape this year with her concert tour, album re-releases, and a blockbuster film.

Bloomberg called its estimates surrounding Swift’s net worth conservative as they include the value of her five homes, music sales, streaming deals, and concert tickets.

The publication calculated:

• The value of Taylor Swift’s music released since 2019 at $400 million

• Income from tickets and merchandise at $370 million

• Earnings from real estate, royalties, and music sales at $310 million

Her Eras Tour was the highest-grossing tour of all time, earning $1 billion in sales. A concern film based on the tour was just released and raked in $100 million during the opening weekend.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research.