Originally posted on my LinkedIn profile, October 20, 2022.
Tesla stock is down 7% following its latest Q3 earnings report this week. This decline follows a nearly 50% drop in the stock since the beginning of the year. As someone who completely eliminated my Tesla position in May, I’m feeling good about the decision to get out of the stock after a nearly 900% total return (180% compound annual growth rate since 2018). Pretty good!
Although Tesla stock has been under pressure since the Q3 earning announcement, the reality is the company’s financial execution as an automotive business was outstanding.
Revenue increased 56%.
Tesla delivered 345,000 vehicle in the quarter, 35% higher than last year.
Automotive gross margins were the envy of the automotive industry at 27.9%.
Operating margin was an incredible 17.2%.
Free cash flow was $3.3 billion, with net cash on hand at $19.1 billion.
So why is the stock down this week after that kind of Q3 performance? Essentially, some of Tesla’s specific Q3 performance (like its vehicle deliveries) missed what analysts expected the company to report for the quarter. Irrespective of analyst expectations, however, much of company’s performance (like the 35% increase in vehicle deliveries in the quarter) is an incredible attainment.
What about the nearly 50% decline in Tesla stock this year?
Many investors often ignore the distinction between how well a company like Tesla is performing as a business versus the valuation of that company based on the price of its stock. Even the best performing businesses at some high valuation level can become overvalued. There should no longer be any debate that Tesla’s growth as an automotive EV business has been tremendous. Yet, when the company’s valuation surpassed $1 trillion, the wise investor needed to challenge the wisdom of the Tesla investor crowd. Even today, Tesla’s valuation stands at a still substantial $650 billion. It’s noteworthy that Toyota, which sells nearly 10 million vehicles per year, only is valued at $220 billion. While Tesla may some day sell 10 million electric vehicles given its 50% annual delivery vehicle growth, the company only will sell around 1.3 million vehicles this year. Tesla is valued 2.5X more than Toyota while selling only one-tenth the number of vehicles. When Tesla’s valuation approached $1.3 trillion earlier this year, the company was a massive 5X more valuable than Toyota. How could that level of valuation be explained? It cannot!
Investors like me have now recognized that Tesla is essentially an automaker of EVs possessing better margins than legacy car companies. I once believed Tesla also led the world in the AI autonomous driving technology that would produce incremental revenue from a future robotaxi business. I assumed the combination of the company’s EV business together with the prospect of new robotaxi revenue supported massive stock valuation growth beyond $1 trillion. It’s clear today, however, that Tesla is a long way from commercializing their autonomous driving technology that could lead to new revenue from robotaxis. Without that type of new business (analogous to an AWS cloud business for Amazon), any valuation approaching a trillion dollars means Tesla is overvalued at that level.
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.