My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Tesla: as resilient as ever

Updated: 4 hours ago

Tesla (TSLA) is a name that investors either love or hate. If you have owned the stock for any significant period of time, you probably love the company and the outsized returns that the stock has generated. If you do not own the stock (and I’m in that camp), your feelings might range from frustration and disappointment to outright anger directed at the company and its founder/largest shareholder, Elon Musk.


In the early days of E-MorningCoffee, I wrote about Tesla (January 7, 2020, here) because I felt the stock was highly over-valued. What’s shocking now looking back is how wrong I was as far as the future trajectory of the shares. I was confident that the TSLA offered nothing but downside at such a ridiculous valuation. I doubled down in a follow-on article a few days later (here), after a further rally in the shares, by saying:


“Tesla has a higher market cap than any global automotive company aside from Toyota and VW, in spite of having the lowest revenues, smallest balance sheet (as measured by total assets), fewest units sold, and weakest credit ratings (proxy for access to capital in the debt markets) of the entire automotive universe. This [the market cap] defies gravity, and I have little doubt will rectify itself in due course.” [Jan 10th 2020]


What has happened to Tesla shares since I wrote that article over two years ago?

  • The shares have increased more than ninefold (949%) since Dec 31, 2019, versus a 16.3% increase in the S&P 500, a 23.4% increase in the NASDAQ Comp and a 33.5% increase in CARZ, an automotive EV-focused ETF (all ignoring dividends). The bottom line is that TSLA has far outperformed the broad indices and the automotive sector, even an EV-focused ETF.

  • If you believe that TSLA is a technology company rather than an automotive company, the shares have still massively outperformed the FAMAG and most other tech names. The appreciation in TSLA shares since Dec 31, 2019 (949%) has been much greater for example than the appreciation in shares of AAPL (113%), MSFT (55%) and NVDA (126%). TSLA has also far outperformed the tech giants over this same period.

  • Needless to say (more on this below), TSLA’s shares have far outperformed all of the individual legacy automotive companies by a very significant margin, too. The closest has been Ford (+45%), but most other legacy automotive giants have shown at best single digit returns, meagre compared to Tesla.

  • Even compared to what is probably the second largest EV company in the world – Chinese company BYD Company (ADRs traded OTC: BYDDY) – TSLA is 67% times larger in terms of revenues and produced more than three times the number of EVs (battery-only) in 2021. TSLA’s shares have outperformed BYDDY’s shares by more than two times since the beginning of 2020.

Tesla is now producing over 1.1 million cars/annum (LFQ), the stock has split twice since I wrote the original article[1], the company was added to the S&P 500 on Dec 21, 2020, and Tesla has been profitable since 2Q2020. Unlike most so-called “high flyers” that were pushed to highly inflated levels by momentum alone during the pandemic, even though most were and still are losing money,, TSLA has retained a large chunk of the incredible appreciation it realised during the pandemic.


The stock remains a darling of investors, although the debate rages on about whether Tesla is an automotive company, a technology company, or something in-between. In fact, more and more analysts are writing about Tesla’s non-automotive businesses which remain largely in the shadows and rarely discussed, including the extensive network of charging and servicing facilities the company has developed. Tesla also has modern and efficient production facilities, whereas its automotive peers are saddled with legacy and less efficient production as they all embark on catching Tesla. The company’s visionary founder – Elon Musk – is more often in the news for the wrong reasons, but the fact is that he started and has overseen the amazing growth of Tesla, turning the company into a leader in the EV automotive market and destined to grow further. Tesla is undoubtedly a disrupter and the leader in the EV market, with modern production facilities and well-regarded vehicles.


The case for EVs is supportive for Tesla


The case for EVs is fairly clear now, as country after country has agreed to halt the production of internal combustion engine automobiles in the future, including the UK in 2030, the EU in 2035, and China in 2040. Several US states have also set dates, as have a number of automotive manufacturers (generally by 2040). The growth of EV (battery only) and plug-ins (hybrids) has been growing significantly, as you can see in this graph below from the IEA.


It you really want to dig into specifics of EV growth and the trends, the Internal Energy Agency prepared a very extensive report “Global EV Outlook 2022” which you can find here.


So is Tesla fairly valued?


I suggest you run your eyes over the tables below, and decide for yourself if Tesla is fairly valued?


I believe that TSLA is still wildly overvalued. I have a very hard time believing that TSLA deserves a market cap more than 1.5 times the top 11 global automotive giants together (collective market cap of around $645 billion vs Tesla’s market cap of $938 billion). These 11 automotive giants sold more than 57 million cars in 2021 compared to Tesla’s one million or so. They also sold twice as many EVs as Tesla in 2021. Here’s my mea culpa – I have been humbled by what has turned out to be a horrific call on Tesla shares over two years ago. Even so, I still can’t bring myself to close my eyes and ignore fundamentals.


Drilling into one comparative, t right that Tesla is worth nearly 10 times VW, when VW produces more than nine times the number of total vehicles as Tesla and a not-to-shabby 450 thousand EVs (one-half of Tesla’s EV production)? The valuation of VW seems to i) significantly undervalue the EV business of VW relative to Tesla, and ii) ascribe little if any value to the rest of VW’s traditional automotive business. As I run my eyes down the list the list of global automotive giants, I still can’t help but conclude that Tesla is over-valued.


How about the tech angle?


I alluded earlier to the performance of TSLA shares vis-à-vis the FAMAG stocks and other well-known tech companies like NVDA, NFLX and SHOP. Since the end of 2019, it has been no contest, as you can see in the next-to-last column in the table below.

You will notice that this table shows two period of time, one ending on November 5 2021 and one starting on the same day. The reason I wanted to include these two sub-periods is that I wrote an article in E-MorningCoffee in early November 2021 (here) suggesting that all of these stocks had reached inflated valuations (none more so than TSLA). In retrospect, that looks to have been a good call because eight of nine of these companies are down sharply since early November. Admittedly of the eight decliners, TSLA has been the “best of the worst”, down 24.2%. Still, TSLA has far outperformed the likes of NVDA, FB, SHOP and NFLX. This table highlights one other interesting thing though, and that’s the resiliency of Apple, which has outperformed TSLA over the more recent period by a hefty margin (AAPL up 2.0%, TSLA down 24.2%) and has even rather remarkably turned in a positive return over the period at the same time that most stocks and the broader indices have plunged. Discussing AAPL will be left for another day.


Many of these tech giants have suffered severe valuation pressures as the broader indices have come back to earth. Several have also struggled as far as operating performance with the culprits including high inflation and the strong US Dollar, not to mention a shift in pandemic preferences and behaviour back towards the pre-pandemic “normal”. The result has been compressing forward P/E ratios, except – of course – for TSLA, which continues to trade at a hefty forward P/E (and ignoring AMZN, a special case for other reasons).


TSLA is rapidly growing in a sub-sector that represents the future of the automotive industry and is unquestionably a darling of the ESG set, but the fact is that the company has nowhere near the margins of many of the large tech companies, and I would also argue that it does not have as wide of moats, either. It is a foregone conclusion that a combination of new entrants and the traditional automotive giants will continue to nip at Tesla’s heels as they, too, seek to chase the EV opportunity ahead.


Conclusion


I have owned TSLA before, and I would own it again, but only if its valuation adjusts to something I can swallow. That hasn’t worked out too well in the past, but hey – it’s not easy to teach an old dog new tricks!

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[1] TSLA did a 5:1 stock split effective Aug 31, 2020, and a 3:1 stock split effective Aug 25, 2022.

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