The buzz has been around Nvidia in recent times, this has led to Tesla taking a back seat. So with the lack of interest, is Tesla finally going to be a value play or a fallen star? Could there be more downside given the developments in the electronic vehicles landscape?

We have touched on Tesla twice in late 2020 and early 2021, the first article was when it was just included in the S&P500 and for the second article, their continued ascent led us to be sceptical.

Tesla shares almost doubled after our first article- we are kind of embarrassed- before coming back to reality. Tesla shares have now fallen back to the 570 million dollar valuation when the first article was published.

Nonetheless, we were impressed with the 15 billion dollar profits for 2023 which was way above our expectations.

It is great to revisit this controversial stock that has fallen from its euphoric peak for now.

 

Tesla EV Market Share

Tesla’s market share has been trending downwards since 2020 when EVs were a rarity. It is no surprise that the competitors start to play catch up as combustion vehicles would likely be a niche segment when the infrastructure for EVs is sorted out.

Tesla’s share of the EV market held steady at 52% but is down significantly from 60% in Q1 2023, and down from 79% market share in 2020 based on data from the US market.

The Chinese EV makers are coming in fast and furious and the recent launch of a sporty EV by Xiaomi (We did a research article on Xiaomi some time back and the execution of the EVs division was a concern- Xiaomi’s execution was brilliant) was sold 3-5 times more than their expectation. It sold 100,000 cars in a matter of weeks and, mind you, this is a car and not a handphone.

It is noteworthy that Xiaomi will be selling their Porsche lookalike EVs at a loss. We believe that they are looking at building a formidable ecosystem that even Apple was not able to create, as Apple pulled out from the car-making business.

Back to Tesla, we could see there was a year-on-year decrease of 13% for Q1 2024 for total automotive revenues. So the pressure is coming on as their market share shrinks, it would need more rabbits to be pulled out from the magician hat by Elon Musk to maintain their lead through innovation.

With the intense competition, Tesla’s decision to prioritize the Robotaxi project rather than delivering the more economical Model 2 (price point of US$25,000) has led to investors punishing the stock.

BYD is likely to take over the Number 1 spot in the leaderboard for 2024 based on the market’s projection.

 

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Carbon Credits

Source: carboncredits.com

As was highlighted in our previous article, one of our concerns was that Tesla was deriving most of their income at that point through the sales of carbon credits.

This revenue source would not be sustainable as the other automakers start to ramp up production for their EVs. 

Up till 2021, the profits of Tesla were mainly driven by their sale of carbon credits rather than their core business. However, the profit for 2022 was close to 12 billion dollars and in 2023 was 15 billion dollars.  So despite a hefty revenue of 1.78 billion dollars from the sale of carbon credits in 2023, it was just slightly 10 per cent of total profits.

Therefore, the business model seems to be working well and even without the carbon credits revenue, it will be a sustainable business based on the financials of the past 2 years.

 

New S Curves for Tesla

Source: Tesla Investor Presentation Deck Q1 2024

Just like Apple’s case, what makes the company valuable is not just its best-selling handsets and gadgets. It is the ecosystem where people will pay for storage, people will pay for apps in their app stores, people will pay for iTunes and use Apple Pay for their transactions etc.

So the above illustration could be a glimpse into the Tesla ecosystem, but we think what is of material interest would be the RoboTaxis and their network of superchargers for EVs. On a side note, Tesla is also developing Optimus which is a humanoid robot that can walk on two legs and engage with the physical world with a pair of arms and hands.

 

Tesla Network of Superchargers

Our impression is that those who own petrol stations are wealthy, as it is a cash cow, you seldom see a petrol station shut down, at least from Singapore’s perspective. Therefore, the network of EV chargers- 50,000 globally and counting- that Tesla has established as the front-runner would be a potential source of stable recurring income for the firm. They have established partnerships with Ford, GM, and other EV automakers so that they can use their network of superchargers.

AutoForecast Solutions says Tesla could generate $6 billion to $12 billion in annual charging revenue by 2030.

 

Tesla Robotaxis

We all know the potential of automated taxis which has a forecasted market of 45 billion dollars in 2030. The current taxi market is at 280 billion dollars and is expected to reach 450 billion dollars in 2030. Therefore, if Robotaxis kicks off, the path to consistent strong growth is very much in the picture.

The economics of Robotaxi is simple, by eliminating the driver, we are looking at 70% of the cost of the conventional taxi model.

There will be regulatory issues such as safety and government licenses to tackle. Chinese authorities have welcomed Tesla to do a road test for their robotaxis model which is good progress.

However, Elon Musk’s claims to put 1 million robotaxis on the road in 2020 have been hot air so far. Nonetheless, he dares to dream and work to make things happen.

We have to give huge credit to him for being able to launch rockets into space at a fraction of the cost of NASA. Also, his perseverance to make EV a reality has come to fruition.

Therefore, if there is anyone who can make Robotaxi a reality, I would not doubt Elon Musk’s ability to make it happen.

However, they face strong competitors such as the Uber and Waymo collaboration and Baidu from China.

Tesla has put a teaser by announcing that they will unveil its “New Robotaxi” on the 8th of August 2024.

 

Elon Musk Effect

We think one of the key merits of investing in Tesla is we are betting on the jockey which is Elon Musk. Just as Steve Jobs is to Apple, the go-getter spirit of a founder as compared to a well-paid corporate executive could not be underestimated.

However, Elon Musk is known to be eccentric and his involvement with so many other projects could be reasons for investors to be wary of.

The recent news is that he was entitled to a pay package of 56 billion dollars – all in stocks- which is almost 10% of the current market valuation. However, with the recent share price drop, the compensation has also dwindled to 45 billion dollars.

That being said, Tesla without Elon Musk, would it lead to a premium or discount to their price? We would think the latter is more likely.

 

Valuation of Tesla

Tesla has always been a stock that needs great imagination to justify their valuation. So we will need to be a visionary valuation maverick to come to the right value. It was at once the gravity-defying stock like the current Nvidia that could do no wrong.

Source: Cleantechnica.com

Despite falling 55% from their all-time high, Tesla is still worth more than Ford, GM, Stellantis, Honda, Volkswagen, BMW, BYD, Hyundai, and Kia combined.

Based on the latest valuation exercise in November 2023, by the modern dean of valuation, Professor Aswath Damodaran, he derived a valuation price target of $180. You can look at his thesis from the link provided.

 

Looking at some of the valuation and financial metrics, P/E of 42, P/B of 8.88, Debt to Equity of 0.083 and Return on Investment of 20%.

Tesla could not be valued as just another automobile company as their valuation still belongs to a growth stock despite their fall from grace. For perspective, most automakers such as Ford, GM and Toyota are trading close to book value whereas Tesla is trading at 8.88 times their book value.

So we have to value it by looking at their ecosystem and any new S curves that they could be developing.

With a current ratio of 1.8 with 26 billion dollars in cash equivalents (net cash after debt of 20 billion dollars), and debt to equity of just 8.3%, the financial strength should not be much of a concern at this juncture.

However, with the intense competition in the EV industry, would the 15 billion dollar profit be sustainable? Based on the extrapolated Q1 24 results where earnings have dropped by close to 50%,  we could be looking at a PE of 80 instead of the current 40.

Also, the energy generation and storage revenue is a small part of their total revenue. However, with greater renewable energy adoption, this business is likely to be a future growth driver. But the impact on their profits from this division is negligible in the near to medium term.

Here is another good analysis and valuation of Tesla stock by Professor Aswath Damodaran done up in January 2023 for your reference.

 

Summing Up

Tesla is always an exciting stock to analyse despite the fact they are no longer in the limelight.

Though Tesla’s share price has dropped 55% from its peak, valuation-wise, it is still a no-go for a value investor as a PE northwards of 40 does seem steep.

Financially, they are still strong with net cash of close to 20 billion dollars.

Looking at their ecosystem and new S curves such as robotaxis, network of superchargers, insurance and energy generation and storage business, it will be an interesting investing proposition.

However, the automotive business is the core driver of profits and they are under intense competition, especially from their China counterparts. There is also a delay in launching Model 2 where priority is given to the Robotaxi.

Nonetheless, the EV growth potential would be enormous. There are currently 1.47 billion cars in the world and out of which only 40 million are EVs. In 2023, Tesla produced 1.85 million EVs. 

If the world embraces EVs as the new normal, the growth runway looks promising based on just the numbers. Tesla being a key player would be a great place to park some funds to partake in this growth and not forgetting the optionality in their other potential S curves that they are building up.

Given the latest valuation done by Professor Aswath Damodaran in Nov 2023, he has factored in the potential of Tesla being not just a normal carmaker, he has come to a price target of $180 which is where Tesla is currently trading.  

Based on the charts, the recent low was $140 and the next support would be $100-$120 levels. We would be interested when Tesla reaches these levels.

 

Read Also: Is Silver Going to be a Great Investment- $50 Target?

 

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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment. It is not a recommendation to buy or sell a security. The content is not directed to any investor or potential investor. It may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.