Saturday, December 2, 2023
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Tesla’s Financial Detour: Warning Signs Every Investor Should Heed

Source: Rokas Tenys /

Investors encounter tough choices when it comes to EV leader Tesla (NASDAQ:TSLA). While I do think EVs represent the future and Elon Musk is widely-praised, the past two years have brought a reality check for growth investors. Indeed, TSLA stock can move in a direction that’s not up and to the right, evidenced by a rather remarkable 2022 selloff.

I think this current market is positioned even more poorly than what we saw in 2022. Rising interest rates are crushing demand across the spectrum in the EV (and ICE) automobile market. Both auto loan rates, and the payment as a percentage of borrowers’ income, have risen substantially over the past year. For more high-end or luxury automakers like Tesla, that’s not great. It’s one of the reasons I posit the company continues to cut its price – there’s a demand problem.

Tesla has aimed to increase EV deliveries, but reduced prices due to weaker demand. This is the reality, and is one many Tesla bulls ignore. Ultimately, I believe this current backdrop is likely to affect the company’s historically strong margins and profitability, posing a challenge for TSLA stock as analysts grow more pessimistic. Concerns around lower margins and volumes driven by discounts and weak demand are real, and I think Tesla will continue cutting prices into 2024. That can’t be a positive for TSLA stock over the next 12 months.

Earnings Weren’t Great

Tesla’s recently-reported Q3 numbers didn’t blow the roof off of anyone’s expectations. Tesla’s revenue came in at $23.4 billion, missing analysts’ estimates but up 13% year-over-year. Profitability dipped with adjusted EPS at $0.66 (versus $0.74 expected) and adjusted net income at $2.3 billion (versus $2.56 billion expected).

This drop in profitability was due to margin pressure from cost-cutting efforts initiated last year. Tesla’s Q3 gross margin was 17.9%, slightly below Wall Street’s 18.0% estimate and down from the previous quarter’s 18.2%.

Wedbush analyst Dan Ives observed that Tesla’s Q3 auto gross margin, excluding credits, was 16.3%, falling short of Street projections at 17.6%. Although they expect margin stability in the future, the lingering concern revolves around Tesla’s continuous price reductions. In response, Ives revised down their Tesla price target to $310 from $350 after the Q3 earnings report.

Growth is in Question

Bernstein observed Tesla’s Q3 balance sheet and identified a shift towards resembling a “regular auto company.” They noted Tesla’s cautious outlook for near-to-medium-term growth, along with the review of 2024 options. Bernstein predicts Tesla might guide deliveries below consensus and face lower-than-expected margins in 2024.

On an earnings call, Tesla executives mentioned laying the groundwork for a new Mexican factory. CEO Elon Musk emphasized the need to reduce car prices due to concerns about high interest rates affecting customers’ monthly payments. He emphasized the importance of cost reduction for affordability.

The company, now under Musk’s ownership, confirmed that Cybertruck production is proceeding as scheduled, with initial deliveries set for November 30th at Giga Texas. Musk noted the challenges ahead, stating that achieving profitability for the Cybertruck at an affordable price will require substantial effort and time, suggesting it won’t be a significant positive cash flow contributor for 12 to 18 months.

What Now

TSLA’s forward price-earnings ratio stands at 58.5-times, which is high but not extreme. However, this multiple is based on past and future expected earnings. I think as these earnings numbers continue to decline along with the company’s margins in the coming quarters, TSLA stock will continue to get repriced. This is a much more mature company which ought to trade closer to an auto industry multiple. That’s the bottom line.

This past earnings call was a disaster, with Musk largely avoiding key questions around Cybertruck production expectations, and focusing a great deal on his “Optimus” project, something that looks more like a big distraction than anything that will ultimately prove to be a profitability driver long-term. This is a stock I remain bearish on right now, for these reasons and more.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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