As of last quarter, Tesla’s a growth stock with no growth.
That’s a bad look. In fact, it’s a contradiction in terms.
Deliveries fell YoY in Q1, and revenue might’ve done the same. We’ll see later Tuesday.
In the last week alone, Tesla saw a pair of top managers hit the exits, slashed prices again in a bid to put a floor under sales and recalled thousands of Elon Musk’s eccentric Cybertrucks to fix — checks notes — malfunctioning accelerators.
You know it’s not going especially well when earnings previews feature headlines like, “Tesla to report with layoffs, robotaxi pivot in focus.” True, Wall Street likes layoffs to the extent they’re indicative of adroit cost management, and if anyone thought the robotaxi dream was close to realization, investors would be in a frenzy today. Alas, neither’s applicable here. The layoffs are tied to falling sales, and the robotaxi pivot’s seen as a Hail Mary.
The stock headed into results on April 23 down seven days in a row and more than 40% YTD.
I don’t have a strong opinion on robotaxis, but I’d generally agree that Musk’s hard pivot to autonomous shuttles at the possible expense of progress on a mass market, lower-cost sedan seems risky. According to a lengthy Bloomberg account published on April 21, Musk’s “all-in” taxi push is “causing all sorts of internal mayhem,” as the outlet put it, summarizing its own coverage.
At the same time, Tesla seems determined to get Musk the $56 billion payout denied by a Delaware Court. That, as the company offered “incorrectly low” severance packages to “some” employees swept up in Musk’s layoffs. (He apologized and promised to correct the mistake “immediately.”)
The whole thing’s a circus. But look who we’re talking about. Consider the source, as they say. As ridiculous as this sounds, I’d be inclined to buy the shares if they fall further after earnings. And maybe even if they don’t. Hold that thought.
Yes, there’s something (a lot) absurd about paying a ridiculous multiple for the absence of growth. “Musk asserts Tesla should be valued as an AI company. Right now, it is a growth stock whose business is not growing and trades 50x earnings,” JonesTrading’s Mike O’Rourke wrote this week. “We won’t go as far as saying it should be valued like its legacy auto manufacturer competitors [but] if markets were functioning properly, the shares would be much further along in this corrective process that has a long way to go,” he went on.
Here’s the thing, though: When it’s not working (and it plainly isn’t right now at Tesla), people like Musk don’t just plod through, hoping for the best. Although Tesla warned that 2024 would be a transition year, describing itself in January as “between two major growth waves,” anyone who thought Musk would rest on his laurels while the company worked on the lower-priced model forgot who Musk is. He probably (doubtlessly) chafed at Bloomberg’s account of the internal dynamics at Tesla, but whatever he says publicly, he thrives on “chaos” (Bloomberg used that word a lot in recent days to describe Tesla). Sometimes, he creates chaos deliberately. A little bird told me so.
I don’t know what the future holds for Tesla, but I’ll say this: The notion that we’ve seen the highs — that Tesla shares will never notch a new record — is far-fetched. I don’t pretend to know how long it’ll take, but it won’t be a Nikkei sort of deal. It won’t be decades.
Absurd as it seems to pay up for no growth, remember that Tesla will never be “fairly” valued. If you’re waiting around on a “sane” multiple to buy Tesla, you’ll never buy it. To reiterate: The stock will never trade on a reasonable multiple. If it ever does, that’s when you know it’s over for Musk. That’s when you should sell.
As it stands, Tesla’s down more than 50% from last year’s highs. Stakes in Musk are on sale 65% off versus the peak. That’s what you’re buying when you buy Tesla: Stakes in Musk. That’s what accounts for the perpetually rich multiple. If you think you’re buying an EV business (or an AI company or anything else) when you buy Tesla, you’re not thinking about it correctly.
As regular readers are well apprised, I don’t care for Musk the man. At all. I think he’s lost down the “red pill” rabbit hole, and in my opinion, that’s a national security risk at this point, particularly if there’s any truth to Ronan Farrow’s contention that we can’t count on Musk to inform the State Department when he plans to speak with the world’s autocrats (some of whom are America’s strategic adversaries). But that’s a separate consideration from whether I’d be a buyer of Musk should “he” go on sale for, say, 75% off (again versus the highs) post-earnings.
Maybe the robotaxi idea — which Tesla has toyed with for a very long time — will work. Maybe it’ll crash and burn. Literally, even. But Musk will figure out something. It’s what he does. And when he does it, the usual army of credulous loyalists and acolytes — which run the gamut from homegamers with $1,000 to gamble on the stock to the Cathie Woods of the world — will be right there shouting, “Shut up and take my money!”
The biggest threat to Tesla is the same as the biggest risk for Apple: China exposure in the event that things escalate over Taiwan. That’s presumably more of a medium-term problem (I mean, hopefully it’ll never be a problem, but hopes don’t trade), but in the event it happens, a huge bite will be taken out of Tesla’s size. If you recall the helpless thrashing of Western companies forced to exit Russia after 2/24/22 salvaging nothing but what they could fit into a carry-on bag, that’s the situation Tesla (and Apple and everyone else with significant operations in China) will face. No amount of Musky grit (ew) can pry a gigafactory out from under Xi Jinping’s thumb.
How engaged is Musk with Tesla at this point? Sure, he is interested in recouping his bonus, but is there any additional focus? He seems more interested in Twitter, SpaceX and Neuralink right now. The big play to develop the breakthrough manufacturing method (single body casting) to bring costs down seems to have been abandoned before it could be implemented. Is there a scenario where he dumps his shares in Tesla and walks away?
No. There’s no such scenario. How does he “walk away”? He is the company. Tesla is Musk, not cars. Anybody who buys Tesla “because cars” is missing the point. Tesla would stop making cars altogether and pivot to — I don’t know, laser guns, maybe — before Musk would “walk away.” I mean, for all the derision (and I’ve offered plenty of derision myself), does anyone seriously believe that Tesla would be better off without Musk? As much as I despise the man, if I were a big shareholder and Musk tried to “walk away,” I’d sell my entire stake immediately.
This underlines the difference between — you know — ad hoc, boilerplate commentary (e.g., “Tesla’s sales are lower YoY for the first time in four years and Musk’s social media antics aren’t helping”) and the reality of the situation, which is simply that if Tim Cook steps down tomorrow, Apple’s still Apple, but if Musk leaves Tesla, Tesla’s not still Tesla. It might still be a viable carmaker. Maybe it even becomes “better” on some metrics. But it ain’t Tesla anymore. Or if it is, only in name. Tesla minus Musk isn’t Tesla in spirit. He’s synonymous with that company in a way that even Jobs wasn’t with Apple or Gates wasn’t with Microsoft. It’s like an exponential version of Bezos with Amazon. Tesla’s identity is inextricably bound up with Musk such that the company ceases to exist in some philosophical ways without him, even as it would obviously still exist as a corporate entity that makes stuff.
No argument that Tesla needs Musk. But what of Musk? He’s a relatively young guy. Is he going to be happy running Tesla in 20 years? I get the impression he likes “shiny, new” challenges. His latest negotiation for “more control” of Tesla was backed by the threat of starting an artificial intelligence company outside of Tesla. Now his bonus is being taken away, the Tesla share price is dropping, he faces competition from China, there are significant legal challenges to autonomous vehicles, and these complex challenges hold little opportunity for glory. Would he be better of without Tesla hanging around his neck? Will he be content just to lend his name to Tesla over the next 20 years with less and less involvement, or will he be tempted to make a bold statement and go out with a bang? If it’s the latter, then this seems like an opportune time.
Remember, Apple’s board fired the founder, much later hired back. Nothing is impossible. To me the only thing I see at Tesla is Musk’s greed and overreach and management’s confusion. Any successful farmer will tell you that building robotaxis is akin to eating one’s seed corn. It is designing the end.
I appreciate the merits of taking a longer view past the always-suspect fundamentals, but this post puts a lot more meat on the key man risk bone that perhaps many overlook with Musk. And that risk is not just from him walking away or getting bored, but includes meeting an untimely if ordinary demise after a lifetime of hard work, pushing limits, substance experimentation, mingling with defenestrating autocrats, and exposure to god knows what chemicals used in EV and rocket manufacturing. At least until he can make himself immortal via Neuralink.
Yeah, this criticism that says people are paying 50x for a slowing business completely misses the mark, I think. I can only speak for myself, but if I were to pay 50x, I’d be paying for ideas Musk hasn’t even had yet, not for some projection of Model Y revenue. In other words: The multiple’s irrelevant because you’re not buying those earnings. You get them as a bonus. You’re buying laser guns, and tunnel tours to the middle of the Earth or you’re buying trips to Mars in lieu of SpaceX’s IPO or whatever else.
So yes, Tesla’s all key man risk. If something happens to him, then what’s left is an under-competing (vis-a-vis Chinese models), underperforming (vis-a-vis consensus) EV company with rapidly slowing sales despite round after round of price cuts.
I do wish he were 10 years younger, actually. That’s one issue I have with this investment proposition. He’s not going to live forever, and there will never be a viable succession plan.
Tesla sells inferior products at premium prices, only reason they’re kept afloat is due to tariff and trade barriers on cheap Chinese EVs.
Unlike ICEs which can well last well over 200k miles with reasonable residual value, EVs are almost worthless scrap once its battery reaches end of life after a few years. in order to increase sales they need to be priced below ICEs to make it compiling to the masses.
Your observation about EV residual value is incorrect. While the batteries lose range over time, at 200,000 miles, that degredation is typically only around 10%. The simpler drive train (and just all around simpler everything except, obviously, the electrical system) makes for lower maintenance and lower chance of failure. Finally, battery packs can be replaced without needing to scrap the car. You just never hear about it because the battery is typically the last thing to fail.
As a bonus, regenerative breaking means the breaks last forever.
I’ve kept a couple ICEs on the road for > 100,000 miles, and the amount of work, maintenance, and TLC to accomplish that was significant. If I had to buy a car that had to last me for the next decade, I’d be much more comfortable buying an EV.
Also, Tesla is “kept afloat” largely on brand value. They’re struggling because there’s sooooo much more competition today than there was just 5 years ago.
Other than sentiment, there are no short-term catalysts for this stock. Dead money for the foreseeable future.
“Other than sentiment.” What else is there when it comes to Tesla? It’s all sentiment. Plot that multiple and show me a time when Tesla was trading on something other than sentiment.
Yes, very true. But there are indications the premium on Musk’s leadership is contracting (e.g., “I wish he were ten years younger, actually”). I am not and have never been a Tesla shareholder. That said, it’s easier today, imo, to argue that Musk’s best days are behind him than at any point since he emerged as a celebrity CEO. Time will tell.
H- extremely nice call on Elon. 🙂
It’s 9:41 AM ET on April 29 as I type this comment. Tesla’s up 29% since this article was published a week ago.
I told you so, folks. Dammit, I told you so.